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Working With the New Social Security Rules

Last update on: Jun 22 2020

Plans need to be revised for those who haven’t begun claiming their Social Security retirement benefits. As we covered last month, Congress eliminated a couple of strategies that could increase lifetime benefits for savvy married couples by tens of thou-sands of dollars.

Social Security benefits still are an important part of your retirement plan. The changes don’t eliminate this critical element. But the options are different, and the better strategy for you might be different now than before the changes.

First, let’s have a quick review. Two strategies are eliminated. One strategy was to file for only spousal benefits, also known as a restricted application. Higher-income spouses filed to receive only spousal benefits (50% of their spouses’ earned full retirement age benefits) between full retirement age and 70. This allowed their own benefits to reach the maximum level. At 70, they switched to receive their own benefits. The strategy now is available only to those who were 62 or older at the end of 2015.

File-and-suspend also was eliminated. After reaching full retirement age, the higher-earning spouse filed for benefits and immediately suspended them. That allowed the lower-earning spouse to receive spousal benefits while the higher-earning spouse earned increases for continuing to defer benefits until age 70.

File-and-suspend is available only to those who are age 66 by May 2, 2016. Anyone older than full retirement age still is able to suspend benefits. But when you weren’t 66 by May 2, 2016, anyone receiving benefits based on your earnings record, such as your spouse or a dependent minor, also will have the benefits suspended.

What’s still on the table for those who aren’t eligible to use those strategies?

Now, it’s even more important for married couples to coordinate their benefits and search for the strategy that will generate the maximum joint lifetime benefit.

Married couples generally fall into two broad categories for which we can develop general rules. One category is dual-earner couples. The other category is couples with one primary earner and one spouse who earned no benefits or much lower benefits. Keep in mind, however, that these only are general rules. The best strategy for a particular couple will vary based on the differences between their benefits and ages and other factors.

In dual-earner couples, the lower-earning spouse’s earned benefits usually are more than 50% of the higher-earning spouse’s benefits. Then, neither spouse will collect spousal benefits. Each should take retirement benefits based on his or her earnings history.

In most of these couples, it makes sense for the higher-earning spouse to wait until age 70 to claim the maximum benefit. The lower-earning spouse often should claim benefits early, perhaps as early as age 62 when first eligible to receive benefits.

The higher-earning spouse should delay benefits because after one spouse dies, the survivor will receive the higher of his or her benefits and the benefits the deceased spouse was receiving. The deceased spouse’s benefits will end. Each couple should want to ensure that survivor will receive the maximum possible benefit, and the way to do that is to have the higher-earning spouse delay benefits until age 70. With a married couple age 65 today, the odds are about 60% that at least one spouse will live to age 90 or beyond. That is well past the pay off period for delaying benefits.

Some planners refer to this as the 62-70 strategy. The lower-earning spouse claims benefits early to start the cash flow while the higher-earning spouse delays for maximum benefits. The strategy might be different if there are reasons to expect a below-average life expectancy for each spouse. Also, the beginning date of the lower-earning spouse’s benefits could vary based on the relative ages of the spouses and other factors.

When the couple had one primary earner, the best strategy probably is a different one. A primary-earner couple is when the higher-earning spouse’s earned benefit is more than twice the lower-earning spouse’s benefit. There are a couple of rules that are important in this situation. One rule is that spousal benefits don’t begin until the higher-earning spouse files to claim benefits. That means the lower-earning spouse can receive only his or her earned benefit until the higher-earning spouse begins benefits. The other rule is that, unlike earned retirement benefits, delaying spousal benefits between full retirement age and 70 doesn’t increase them. There’s no benefit to delaying spousal benefits past full retirement age.

That’s why this situation is more difficult and the best choice can depend on the relative ages of the spouses.

When the higher-earning spouse is more than four years older than the other spouse, the choice is easy. The higher-earning spouse delays benefits until age 70. The lower-earning spouse can begin receiving earned benefits as early as possible, even age 62, though it will result in a low benefit. Then when the lower-earning spouse reaches full retirement age, the higher-earning spouse already will be 70 and claiming retirement benefits. The lower-earning spouse can begin spousal benefits.

The decision is more difficult when the higher-earning spouse is fewer than four years older than the other spouse. Ideally it’s best in the long term for the higher-earning spouse waits until age 70 to maximize benefits. That ensures the surviving spouse receives the maximum long-term benefit no matter how long he or she lives. But that means the lower-earning spouse doesn’t receive spousal benefits for as much as four years after full retirement age. How much money is foregone in that situation depends on the relative incomes of the two spouses, but it could be a significant amount. If the spouses turn out to be long-lived, then delaying will pay off. But if they’re not on the long side of life expectancy, then the delay could be expensive.

Because of the uncertainty, the best bet probably is for the higher-earning spouse to claim benefits at full retirement age instead of waiting for the maximum benefit.

The decisions seem difficult, and they are. It is best not to make the decision on your own. You could seek out a financial planner who is well-versed in Social Security claiming strategies or use one or more of the many calculators available to help claim benefits. I recommend using more than one calculator, because there can be differences in their calculations and recommendations.

Of course, use the calculator at the Social Security web site. T. Rowe Price and AARP also have free calculators, each with limits and advantages. More robust calculators are available at MaximizeMySocialSecurity.com, Social-SecuritySolutions.com, and SocialSecurityChoices.com. (Ignore the hyphens.) These sites charge relatively low costs to use their calculators and might have free versions available. Also consider the free calculator at Bedrockcapital.com/ssanalyze/.

While the numbers are important, the Social Security calculations shouldn’t be considered in isolation. As mentioned, longevity is a key factor. There’s not much point in delaying benefits if there’s reason to believe a couple will fall short of average life expectancy. Cash flow is another important consideration. If you need the money, Social Security benefits need to begin sooner rather than later.

Your goals also matter, if one of your prime goals is to leave something for heirs, then delaying Social Security won’t be helpful. You can’t pass Social Security benefits to your heirs, other than a surviving spouse. To resolve this issue, you need to work with a financial planner who will look at all your assets and sources of income and help you match them with your goals.

RW January 2016.

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