The good news out of Washington last week is that Congress was able to pass budget legislation and avoid a government shutdown. The bad news is that some retirees will no longer have access to two popular Social Security claiming strategies, including file-and-suspend and restricted application.
For couples who are at or past their full-retirement age, the complex rules associated with Social Security retirement benefits up until now have allowed for the two aforementioned strategies.
Consider a husband and wife who are both at their full retirement age of 66 and are each entitled to $2,000 per month from Social Security on the basis of their own work records. Up until now, instead of simply starting to collect a combined $4,000 of monthly income, one spouse could file for their own benefit and immediately suspend the election. This would trigger the ability of their spouse to file a restricted application for spousal benefits only. As a result, a $1,000 spousal benefit (50% of the worker’s full benefit) would start arriving monthly. That amount would continue while each spouse let their own benefit continue to grow behind the scenes at 8% per year until age 70. Then, at age 70, each spouse would receive 132% of their full retirement benefit (1.32*$2,000 = $2,640 per month). In essence, the $1,000 that was received by the spouse from age 66 to 70 was found money. This strategy has been quite common for those who are either still working well into their 60’s, and/or have sufficient assets to live off of while waiting for their maximum Social Security benefits at age 70.
Once the reform goes into affect, those who turn 62 in 2016 or later will not be able to utilize the file-and-suspend or restricted application claiming strategies. For those who have already enacted one or more of these claiming strategies, their plans will be unaffected. For those who are 62 or older by the end of 2015, there will be a 6 month grace period that goes into affect when the legislation is signed. This will mark the last 6 months that these strategies are available to this select group of retirees.
While closing this ‘loophole’ probably makes sense for the sake of protecting the long-term viability of the Social Security program, it will have a negative impact on many retirees’ plans. For those who qualify, it may make sense to determine whether or not one or both of these strategies should be considered over the course of the next 6 months.
Please feel free to use us as a resource if you have any questions regarding this topic. We are more than happy to assist.
Christopher W. Frayne, CFA®, CFP®