If you’re married (or divorced after a 10 year or longer union), it’s time to forget part of what you’ve read about Social Security claiming strategies for couples... That’s because the arcane “file and suspend” strategiesthat had allowed some married couples and divorcees to receive tens of thousands in extra government retirement benefits are being curbed by the two year bipartisan budget deal that just passed Congress.
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But good policy or not, the changes still don’t make a couple’s decision about when to claim benefits simple. And in the short term, they will make things even more complicated for those approaching retirement, as they wrestle with a phase-in of the new restrictions that could cause them to revise existing retirement plans.
The most sweeping new restrictions affect those who will turn 62 after 2015 , in other words, those born in 1954 or later, which includes more than half the Baby Boomers. Some older Boomers could also take a hit, although anyone who is already using the strategy –or adopts a file and suspend strategy in the next six months—is protected in the final legislation. (Note: an earlier version of the budget that would have cut benefits for some who had already used file and suspend was wisely changed.
Here some background is needed. Social Security’s “full” or “normal” retirement age is 66 for those born from 1943 through 1954. It rises two months a year after that and is 67 for anyone born in 1960 or later. (Expect that to rise in the future for the after 1960 crowd.) But regardless of your full retirement age, you can claim your retirement check anytime after 62.The longer you wait the bigger your ultimate check will be. After full retirement age, each month you wait until 70 raises your benefit by 0.67%. That’s an at least 8% bigger monthly check for each year you delay. (If you’re still working and earning good money your benefit could go up even more than 8% a year, since you might qualify for a bigger base benefit.) This 8% a year delayed retirement credit is a particularly good deal for those with Methuselah genes. (More on determining your personal life expectancy is here.)
Note that only one partner of a married couple can claim spousal benefits. But if a couple divorced after at least 10 years of marriage, and never remarried, each could claim spousal only benefits beginning at age 66, while his or her earned benefit continued to grow. Say two career long high earners married young, divorced after 10 years, never remarried and turned 66 this past January. Even if they were both still working and pulling down big bucks, each could claim a “spousal” benefit equal to 50% of the other’s benefit. The maximum benefit for a high earner retiring at 66 this year is $2663. So for four years, each ex-spouse could collect half of that —$1,331.50 a month—based on the earning history of the other, while allowing his or her own benefits to grow. (Thanks to that 2000 law, after you reach full retirement age, there’s no limit to how much you can earn, while also collecting benefits.) At 70, each ex would collect his or her own larger benefits and the spousal benefits would end. That’s an extra $64,000 or so for each of them out of Social Security’s coffers.
Keep in mind that during the next six months, anyone who begins taking spousal benefits based on a file and suspend gambit, can continue to benefit from it until 70.
And after that? The loophole will be shut in two stages. After the six month window closes, if someone claims and suspends his benefits, then all checks based on his earnings—including spousal and dependent benefits— will be cut off. So if both husband and wife are 63 now, they won’t be able to use file and suspend. (That also means someone with a minor or disabled child will no longer be able to allow his or her own retirement benefit to grow between full retirement age and 70, while the dependent receives benefits.)
Some mixed age couples will be unaffected. For example, if a now 63-year-old woman has a 67-year-old husband, then when she turns 66 she can take spousal benefits based on his earnings. The reason, of course, is that by then he’ll be 71 and will be receiving benefits i.e. not in suspension.
The second stage of the loophole closer? Those who turn 62 after this year will lose the ability to take only spousal benefits at their full retirement age. In effect, those born in 1954 and later, when they apply for benefits, will be deemed to be applying for their own benefits, as well as a spousal check. (Remember, they only get the one that’s larger.)
Put another way, it will no longer be possible for both spouses to let their earned benefits grow until 70, while one collects a small check. But –and this is crucial—the survivor’s benefit is untouched. At the death of the first spouse, the survivor can take whichever check is larger. The result, says Michael Kitces, a financial planner who has written extensively on Social Security claiming strategies, is it usually makes sense for one spouse to delay benefits until 70, but it’s “very uncommon for it to be best for both to wait until 70.’’ Note that the changes also won’t affect the ability of a divorced, never-remarried spouse to claim their ex’s full benefit at his or her death— if it’s larger than their own check. (You can find Kitces’ explanation of the changes here.)
To determine your own best strategy going forward, wait a few weeks for the calculators to be updated, and then run one. (Kotlikoff sells a sophisticated calculator for $40 a year here and you can find pretty good free calculators atAARP and T. Rowe Price , among other places. You can also get an estimate of your benefits from Social Security here.) Of course your personal life expectancy, as well as your other financial resources will also influence your decision about when to claim benefits, which is one of the most consequential financial decisions many retirees will make.
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