On April 30, two lucrative Social Security filing strategies are going by the wayside. I’ve written about this before. Still, there seems to be a lot of confusion about how these so-called “loopholes” work and who is eligible for them. And since the deadline to use them is almost here, this installment of Retirement Insider is dedicated to making your options perfectly clear.
First off, if you were born in or after 1954, you can stop reading right now. Both of these strategies—“file and suspend” and “restricted application for spousal benefits”—are off the table for you. They were eliminated when Congress passed the Bipartisan Budget Act of 2015 last November.
You can also stop reading if you’re single. Both strategies were designed for couples.
Are you still with me?
Okay. So, let’s say you were born before 1954.
If you were at least 62 years old in 2015 and are in a two-earner household, you may be eligible to file a restricted application for spousal benefits at full retirement age (FRA). (FRA is 66. So, depending on your age right now, that could be this year or as late as 2019.)
We’ll talk about this option in a minute. But first, let’s take a look at file and suspend.
The File-and-Suspend Strategy
If you will have reached FRA by April 30, 2016 (in other words, if you were born after April 30, 1950), you are still eligible for file and suspend. But you need to get on it. You must file before May 1, 2016.
PIA? FRA? AIME? What Are Those?
PIA is your “primary insurance amount.” This is the dollar amount of your monthly Social Security check if you begin taking benefits at your FRA.
Your PIA is based on your average indexed monthly earnings (AIME). If you’re interested in the math, the calculation is a four-step process explained here.
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To determine whether or not this makes sense for you, we need to talk a little about spousal benefits.
When your spouse reaches age 62, even if he/she has no work history, he/she may begin receiving Social Security as the spouse of someone (you) who is entitled to it. Your spouse cannot claim the spousal benefit until you have filed for your own benefit. But once you do, he/she can start collecting a benefit equal to 50% of your PIA.
Here’s what’s important: You do not have to start collecting your benefit immediately. After filing, you can ask to have the payments suspended.
Why suspend? By suspending your payments, your benefit will continue to grow (until age 70) as if you had not yet filed.
Let’s look at an example…
Betsy and Frank are married and are both at FRA (66). Betsy’s PIA is $2,000. Her husband, Frank, has no work history. Betsy files for Social Security. This enables Frank to claim his spousal benefit of $1,000 per month (50% of Betsy’s PIA). But Betsy asks for her payments to be suspended until she reaches age 70. This allows her benefit to grow while Frank collects his $1,000 per month.
By waiting until age 70, Betsy’s benefit increases to $2,640 per month. So, at age 70, Betsy and Frank’s combined monthly income is $3,640. Meanwhile, they will have received $48,000 in spousal benefits (48 x $1,000). And by age 90, they will have collected $921,600 in Social Security income.
If, instead, Betsy files for her benefit at FRA but does not use the file-and-suspend strategy, she and Frank will have collected $864,000 in Social Security income by age 90.
And if she waits to file for her benefit until age 70, once again not using file and suspend, she and Frank will have collected $873,600 in Social Security income by age 90.
As you can see, Frank and Betsy will be money ahead by using the file-and-suspend strategy. However, it takes a while to pay off. Filing at FRA provides more income in the short run. But the lines cross at age 82.5. From then on, the file-and-suspend strategy is superior.
The Restricted Application Strategy
The restricted application strategy is often confused with file and suspend. That’s because both involve the spousal benefit, and they are often used in conjunction with each other. To understand the difference, we have to go back to some Social Security basics.
Each spouse in a two-earner household is entitled to two potential Social Security benefits. Their own benefit, based on their work history, and the spousal benefit, based on their spouse’s work history. You can file for one or the other. (As noted above, to file for a spousal benefit, your spouse must have filed for theirs.)
But here’s the catch. When you file for a spousal benefit, you are deemed by the Social Security Administration to be filing for your own benefit as well. (That’s why the restricted application strategy is also known as “filing as a spouse first.”) What you’ll receive is the larger of the two benefits. And from that point on, you will no longer accumulate delayed retirement credits (DRC).
So, the concept behind the restricted application is pretty simple. Once you’ve reached FRA, you can file a restricted application and receive only your spousal benefits. Meanwhile, your own benefit will continue to grow.
Let’s look at a couple of examples…
What’s DRC?
DRC is Social Security-speak for delayed retirement credits. If you delay benefits beyond your full retirement age, your birth year and the number of months you delay determine how much your benefit increases.
If you were born after 1943, your benefit increases by two-thirds of 1% per month until age 70, or 8% per year.
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Paul and Lydia are both 66 (FRA) and eligible for file and suspend and the restricted application strategy. Both have a PIA of $2,000. If they decide to do nothing and simply wait until age 70 to file, they will accumulate DRC for the next four years. As a result, instead of $2,000, they will each be collecting $2,640 per month. That would give them a total of $63,360 annually. By age 90, they will have collected $1,267,200.
But let’s say Lydia files and suspends. This allows her benefit to grow to its maximum of $2,640 per month. It also permits Paul to file a restricted application for his spousal benefit. But remember: By filing for his spousal benefit ($1,000—50% of Lydia’s PIA), Paul is considered to be filing for his own benefit ($2,000) as well. He’ll receive $2,000, the larger of the two benefits. But now, he will not accumulate DRC. So, by age 90, Paul and Lydia will have collected only $1,209,600—almost $60,000 less than what they would get by waiting until age 70 to file.
To maximize their lifetime benefits, the best strategy is for Lydia to file and suspend and for Paul to file as a spouse first (the restricted application). Paul will receive his spousal benefit of $1,000 per month while his own benefit continues to grow. And by age 90, Paul and Lydia will have collected $1,315,200—$48,000 more than they would get by waiting until age 70 to file.
Another example…
Beth and Joe are 62. Because they will not have reached FRA (66) by April 30, 2016, they are not eligible for file and suspend. However, they can take advantage of the restricted application strategy.
Joe’s PIA is $800; Beth’s is $2,000. They’ve decided that Beth will wait until age 70 to file for her benefit. But to help with cash flow, Joe files now at age 62. Because he filed before FRA, his benefit is reduced to $600 per month.
At FRA, Beth will file a restricted application that will allow Joe to collect a spousal benefit of $1,000 (50% of her PIA). Meanwhile, her benefit will continue to accumulate DRC.
Joe will collect $28,800 for four years ($600 x 48 months) on his own benefit. Then, at age 66, he will start to collect a spousal benefit of $1,000 per month. And when Beth files at age 70, her benefit will have grown to $2,640. So, by the time they’re 90, they will have collected a total of $950,400.
If Beth had not filed a restricted application, Joe’s benefit would have remained at $600 per month until they were 70, at which point it would have switched to “whatever benefit is higher”: Joe’s $1,000 spousal benefit. Not knowing about this strategy would have cost them $19,200 in lost Social Security income.
And what if Joe had waited to age 70 to file? His benefit would have grown to $1,056. The couple would receive a monthly income of $3,696, or $44,352 annually. By age 90, they would have collected $890,736—more than $62,000 less than with the restricted application strategy.
The Future
Social Security being under a lot of pressure isn’t news. When it began in 1935, there were some 40 workers paying into the system for every retiree. Today, there are just 2.8 workers for every retiree. So, you can count on Social Security taxes going up and benefits being reduced.
The elimination of these two filing strategies is just the first blow for seniors. What’s particularly disheartening is the way it was done. Behind closed doors with no opportunity for comment or debate.
Building your net worth is the only way to ensure a satisfying retirement. So, I urge you—if you haven’t already—to join PBRG’s Wealth Builders Club and take advantage of its immense curriculum of wealth-building strategies.
It’s never been more important to take control of your own financial destiny.
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