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Social Security ChangesSubmitted by Townsend Asset Management Corp. on December 15th, 2015
Last fall’s budget deal in Washington to raise the U.S. debt limit also impacted two Social Security claiming strategies that had become popular – obviously too popular – with retirees.
A little terminology first: Workers covered by Social Security can claim Social Security benefits as early as age 62 (with a reduction in benefits); at “full retirement age” (66 – 67 for most of us), with no reduction in benefits; or as late as age 70, with the ability to receive an 8% per year benefit increase. In addition, a spouse who never worked, or only worked a little, can claim the higher of their own benefit or up to one-half of their spouse’s benefit. Now, to make the following discussion a bit easier to follow, let’s give these spouses some names – Ted and Lillie – and let’s assume that Ted worked and earned Social Security benefits of $2,000 per month, while Lillie’s work only entitled her to a benefit of $800 per month.
File and Suspend
The original purpose of “file and suspend” was to allow a person who has filed for benefits to change his mind and suspend benefits in order to earn the additional 8% per year in delayed credits. But, we are clever people, and file and suspend began to be used in situations where one spouse (Lillie) wanted to file for her spousal benefit before Ted was ready to claim his own benefit. This was a dilemma, because a requirement for spousal benefits is that the worker spouse (Ted) must have filed for his own benefit before their spouse is eligible to file for a spousal benefit.
So, in this case, Ted would file for his own benefit, thus entitling Lillie to claim a benefit equal to one-half of Ted’s (so, $1,000 per month) and not be limited to her own, lower benefit of $800 per month. But, once Ted filed, he would immediately suspend his $2,000 monthly benefit in order to build the 8% per year delayed credits.
However, beginning May 1, 2016, all this changes, and Lillie will no longer be able to claim any spousal benefits while Ted is suspending his own benefits. Of course, Lillie would still be able to claim her own $800 per month benefit.
A “restricted application” is also known as the “claim now claim more later” strategy. In this case, at his full retirement age, Ted would claim a spousal benefit equal to one-half of Lillie’s benefit, so a $400 per month benefit. This assumes Lillie has also filed for her own benefit and is receiving $800 per month. So, while receiving this $800 monthly spousal benefit, Ted’s own benefit of $2,000 per month continues to grow at 8% per year up through age 70, and, at that time, he switches and begins claiming his much higher benefit.
Congress has killed this restricted application strategy, but left a small window open to a few folks. If a person is older than 62 by December 31, 2015, they can still follow the old rules and file a claim just for spousal benefits when they turn 66.
So, if you were at least 62 last year – congratulations !
Gerald A. Townsend, CPA/PFS/ABV, CFP®, CFA®, CMT is president of Townsend Asset Management Corp., a registered investment advisory firm offering comprehensive wealth management expertise to its clients. Email Gerald@AssetMgr.com for more information. For the latest news and updates, follow Townsend's growing platforms on Linked In, Facebook and Twitter.