Believe it or not, a bipartisan federal budget deal might affect your retirement planning strategies.
The Bipartisan Budget Act of 2015, signed into law last November, eliminated two Social Security claiming strategies that have been used by many people to maximize their benefits. Depending on your age, though, you might still be able to use these strategies.
The file-and-suspend strategy
The first strategy, known as file-and-suspend, has been used mainly by married couples, especially if one spouse has earned substantially more than the other. Upon reaching full retirement age, the higher-earning spouse files for Social Security benefits and then suspends receipt of the benefits until later — usually, until age 70.
As a result, this spouse will receive delayed retirement credits totaling 8% per year, or 32% if he or she waits until age 70 to receive benefits. In addition, the lower-earning spouse can receive spousal benefits based on the higher-earning spouse’s earnings record if they are more than his or her own benefits. In general, these benefits are equal to 50% of the higher-earning spouse’s full retirement amount, assuming the higher-earning spouse has reached full retirement age.
The budget act makes a subtle but crucial change to this rule: Married individuals can no longer receive a benefit based on their spouse’s earnings unless the spouse is actually receiving those benefits. This effectively eliminates the file-and-suspend strategy.
Fortunately, the law contains a provision that grandfathers in anyone who is currently using file-and-suspend. You also can use file-and-suspend if you will reach age 66 before May 1, 2016, and file to claim benefits by this date.
The restricted application strategy
The second Social Security claiming strategy affected by the budget act is known as “restricted application.” Here, a spouse reaching full retirement age who is eligible for both retirement and spousal benefits files a restricted application for spousal benefits only. At this time, the spouse delays applying for his or her own benefits, but can switch and start receiving these benefits later.
Using this strategy, a higher-earning spouse can claim 50% spousal benefits upon reaching full retirement age instead of taking his or her own benefits, thus enabling these benefits to continue to grow. The lower-earning spouse doesn’t have to have reached full retirement age.
When the higher-earning spouse starts receiving his or her own benefits, the lower-earning spouse can switch to a spousal benefit based on the higher earner’s benefits at full retirement age. Using this strategy, some married couples have been able to increase their Social Security benefits by tens of thousands of dollars.
The budget act is phasing out the use of the restricted application strategy. If you’ll turn 66 before May 1, 2016, you can file a restricted application anytime between ages 66 and 70. If you turned 62 before the end of 2015, you can file a restricted application for spousal benefits when you turn 66 so long as your spouse — or, if you’re unmarried and meet certain other criteria, your ex-spouse — is at least 62.
A fresh look
These changes make it critical to take a fresh look at your Social Security claiming strategies, especially if you fall within the age ranges outlined here. Contact your financial advisor to discuss your situation in more detail.