At the beginning of each year, many of us create resolutions for saving and spending.
This year it is especially vital to understand a crucial policy change MMthat Congress passed late last year as part of a budget deal. In it, Congress phased out a Social Security claiming strategy called “File & Suspend/Restricted Spousal Application.”
This news caused quite a stir, particularly because there has been much concern over the viability of the Social Security program. As pensions become less common, Social Security is quickly becoming the backbone of retirement for many.
Strategies vary based on marital status, earnings and disability history. Social Security benefits can be con- fusing and policy changes may seem alarming. Between the various claiming options, updates to the program and misinformation available, exactly how should you decide on a strategy?
To start, when reviewing your Social Security benefits, it’s best to do so within the context of a full financial plan. Each individual’s tax situation and spending goals, marital history, health status and retirement date varies.
Keep these key point in mind: The soonest you may apply for benefits (which varies, but is generally 62), the age you may collect “full,” unreduced benefits called “Full Retirement Age” (FRA) and the latest you may collect benefits, which is age 70 for everyone.
TAKE CHARGE OF YOUR SOCIAL SECURITY
Because the Social Security Administration is no longer regularly mailing statements, it’s best to visit the Social Security website www.ssa.gov to determine your benefits. On the site, create a login to your personal record and find your “Full Retirement Age.” This is the age any American who has worked long enough at a job where they paid into the Social Security system (at least 40 calendar quarters total) may claim the “full” benefit.
If you fall into this category and are married or divorced but previously married for more than 10 years, the recent legislative changes may apply to you.
The claiming strategy that changed this year is commonly called “Claim Now, Claim More Later,” or “File & Suspend/Restricted Spousal Application.” It has been used by some married couples and divorced individuals who met certain qualifications.
This is how it used to work: If the higher earner was older, they would file for benefits at FRA, but immediately suspend them until a later date, thus receiving an 8 percent higher annually compounded benefit for each year they waited to collect, starting at age 70 at the latest.
When their spouse, the lower earner, turned FRA, they filed a restricted spousal application and collected that benefit while allowing their own personal benefit to also accumulate at 8 percent a year. Then at 70, they would elect to stop collecting the spousal benefit and “activate” their own, maximized benefit.
This resulted in “bonus” dollars for the couple during the years between their Full Retirement Ages and age 70. For two divorced individuals who reached full retirement age but never remarried, the strategy was even more costly to the Social Security Administration. They could both col-
lect a spousal benefit while allowing their own to be maximized at 70.
Congress determined this was an unintended loophole that primarily benefited people who could afford to suspend benefits until age 70. Whether or not that is the case, it will no longer be available to the following individuals who previously qualified, which include:
• Currently married individuals, where one spouse turns 62 in 2016 or later, who have both worked in jobs contributing to Social Security (at least 40 quarters) and are each eligible to collect on their own work history.
• Divorced individuals turning 62 in 2016 or later, who were married for over 10 years and fulfill the same work/age/eligibility requirements as above married individuals.
WHAT’S NEW
Starting this year, for everyone turning 62 in 2016 or later, (including married couples where one spouse turned 62 by December 31, 2015, but the other is younger) when applying for benefits you will be considered filing for benefits based on your own work history. If your spousal benefit happens to be higher, you may elect the spousal benefit, but will continue to collect it until the death of your spouse. At that time, you will have the option to collect your deceased spouse’s benefit assuming it was higher than your own.
Even with the phase out of the File & Suspend/Restricted Spousal Application strategy, there are other strategies and combinations of strategies married couples may consider. A full financial plan, which analyzes your current savings levels, spending goals, investment allocation and risk strategy, is the ideal vehicle for weighing your options. These include claiming early at 62 at a reduced benefit, claiming at full retirement age, filing and suspending benefits (to receive a higher benefit) up until 70 or any combination of these strategies.
If you turned 62 before the end of 2015, you may still elect the File & Suspend/Restricted Spousal.
APPLICATION STRATEGY
While everyone should research their options, the recent changes will not apply to you if you are:
• Single
• Divorced, previously married for less than 10 years
• Turned 62 before the end of 2015
• Anyone who is currently married, or divorced but previously married for 10 or more years, and whose personal work history is less than 40 quarters (10 years) total
• Married, but the spouse with higher earnings history/Social Security benefits is younger
The latter group may claim a spousal benefit, which is half the amount of their spouse’s FRA benefit. If you are widowed, disabled or care for a disabled dependent, contact your local Social Security office to discuss your options.
Take charge of your Social Security, review your benefits and consider consulting with a financial expert if you aren’t sure how to incorporate the new policy changes into your retirement plans.
