Navigating Social Security Claiming Changes for Clients

The Bipartisan Budget Law that went into effect last November brought major changes to the options that retirees had for claiming their Social Security benefits. The new rules are still confounding many financial advisors as well as their clients, even though there are now fewer choices available in the system.

The file-and-suspend rules have changed dramatically, so that it is no longer possible for a retiree to suspend his or her own benefit and claim spousal benefits in the meantime. Those who were at least 66 years old and who filed and suspended their benefits on or before April 29, 2016, are grandfathered under the old rules and can still use the file-and-suspend strategy. Those who qualify can allow their own benefit to grow by 8% per year while it is suspended and still receive spousal or other benefits as well. (For more, see: Social Security File and Suspend to End: How to Adjust.)

But under the new rules, this option is no longer on the table for current retirees. It is still possible for filers to suspend their benefits in order to allow their benefit to grow, but they cannot receive any other benefits during the waiting period. Any spousal or other benefits will also be suspended when the filer chooses this option. There is one exception to this rule that applies to divorced spouses. An ex-spouse is still allowed to receive spousal benefits even if the other ex-spouse suspends their benefits.

Clients who were born before Jan. 1 of 1954 are also still allowed to file a restricted claim for spousal benefits and claim spousal benefits while their own benefit continues to accrue. They will receive half of their current or former spouse’s benefit as long as their spouse either filed or suspended their benefits before the April 29 deadline of this year. For example, a husband elected to suspend his benefits before the deadline and turned 66 in March of 2016. His wife will be eligible to file a restricted claim for benefits when she turns 66. She can receive half of her husband’s full retirement benefit while her own benefit is suspended. Both spouses can then receive the maximum possible payout on their Social Security benefits when they turn 70.

Clients who are born after January 1, 1954 do not have this option. When they apply for benefits, they are “deemed” by the Social Security Administration to have applied for all of their eligible benefits and will automatically be paid the greater of the two amounts. However, the “deemed filing” rule does not apply to survivor’s benefits. Surviving spouses and ex-spouses have the option of claiming survivor benefits first and then switch to claiming their own retirement benefit at a later time. They could also do this in reverse order if they would receive a larger payout be doing so. (For more, see: Alternative Strategies to File and Suspend.)

Advisors are still struggling in some cases to help their clients make the best choice possible when they apply for their benefits. For example, consider a couple where the husband wants to suspend his benefit until age 70, while his wife wants to begin taking her benefit at age 62. Under the new rules, the husband’s suspension of benefits will not trigger a benefit for his wife. She can collect a reduced benefit at age 62 based solely upon her own earnings (provided that she has any) and then begin receiving a larger benefit when her husband turns 70. But her benefits will be permanently reduced if she begins taking benefits at 62, and her spousal benefit will be equal to less than half of her husband’s full retirement age amount. Any spousal amount in excess of this will be added to her own reduced retirement benefit.

It is important to note that the spousal benefit is based upon the retiree’s full retirement benefit at age 66 and not on the maximum benefit that they would receive at 70. But if the higher-earning spouse dies first, then the surviving spouse will inherit the deceased’s higher benefit, and any delayed retirement credits will also be paid. The surviving spouse’s personal lower benefit will cease to be paid. (For more, see: Tips on Delaying Social Security Benefits.)

Another situation to consider is when a filer is 59 years old who was married for 12 years but got divorced 20 years ago. She is the same age as her ex-husband and wants to file for a spousal benefit at age 62 that is based on her ex’s earnings and suspend her own benefit. Unfortunately, the new rules prohibit this option for her. She is not old enough to file a restricted claim for spousal benefits under the old rules, and she is only eligible to receive a reduced retirement benefit if she files at 62. She will also be subject to the earnings restrictions if she is still working while she collects her benefits.

She will receive a benefit equal to 72.5% of the full benefit that she would get if she waited to collect her benefit at her full retirement age of 66 years and 6 months. If there is any excess spousal benefit, this will be paid on top of her regular benefit. If she elects to collect her benefit at age 62, then she will only receive 33.8% of her ex-husband’s full retirement amount, while she would receive 50% of this amount if she waits until full retirement age.

Planning for Social Security is a vital element of retirement planning. The decision of when to begin receiving benefits is a serious matter that clients should discuss with their financial advisors before taking action. Failure to choose the best option can cost clients thousands of dollars in retirement and spousal benefits, and advisors need to understand the choices that are available to their clients in a given situation in order to advise them correctly. There are no one-size-fits-all solutions when it comes to choosing Social Security benefits. Factors such as the client’s age, projected longevity and other retirement assets must all be carefully factored in to the decision making process in order to maximize this benefit. (For more, see: How to Boost Social Security Spousal Benefits.)