One year after the Bipartisan Budget Act of 2015 was signed into law on Nov. 2, financial advisers continue to be baffled by how to help their clients maximize their Social Security benefits under the new claiming rules.
I get it. The new rules are confusing. But it might help to keep the following three key points in mind.
One, although the “file and suspend” strategy is now history, anyone who was at least 66 years old and who filed and suspended their benefits by April 29, 2016, is grandfathered under the old rules. That means eligible family members can collect spousal or dependent benefits during the suspension — even if they claim benefits after the deadline — while the worker's own retirement benefits continue to earn delayed retirement credits of 8% per year up to age 70.
Under the new rules, you can still voluntarily suspend benefits at 66 in order to earn delayed retirement credits. But during a voluntary suspension, other benefits payable on your record, such as benefits to your spouse or child, are also suspended. And if you have suspended your benefits, you cannot continue receiving other benefits, such as spousal benefits, on another person's record.
But there is a crucial exception to this suspension rule: A divorced spouse can continue to collect spousal benefits even if his or her ex suspends benefits.
Second key point: Some clients still will be able to claim only spousal benefits at 66 while their own retirement benefits continue to grow up until age 70. But in order to “file a restricted claim for spousal benefits,” they must have been born on or before Jan. 1, 1954.
An eligible client can collect half of his or her spouse's or ex-spouse's full retirement age amount while delaying their own benefits assuming the other spouse is actually receiving Social Security benefits or filed and suspended benefits by the April 29, 2016 deadline.
For example, a husband filed and suspended his benefits when he turned 66 in March 2016. His wife can file a restricted claim for spousal benefits when she turns 66 in November 2016 and collect half of the husband's full retirement age benefit amount. Both spouses can collect their maximum retirement benefits at 70.
Younger clients will never have the option of choosing which benefit to claim. Clients who was born after Jan. 1, 1954, will be “deemed” to apply for all available benefits when they file for Social Security and will be paid the higher of the two amounts.
Finally, the so-called “deemed filing” requirement does not apply to survivor benefits. As a surviving spouse or surviving divorced spouse, you can still claim survivor benefits first and switch to retirement benefits later, or vice versa, if it ultimately would result in a bigger benefit.
Here's a sample of some recent emails I have received from advisers.
“My client wants to wait until he is 70 to claim his maximum Social Security benefit, but his wife wants to take benefits at 62,” one adviser wrote. “How do the new rules affect them?”
“If the husband waits until 70 to claim his Social Security, it will not trigger a benefit for his wife until then,” I replied. “In the meantime, the wife could collect Social Security on her own earnings' record — assuming she has a work history — as early as age 62 and then step up to a larger benefit once her husband claims at 70.”
However, if the wife collects Social Security early, her benefits will be permanently reduced and when she steps up to a larger spousal benefit, it will be worth less than half of the husband's full retirement age amount. Any excess spousal amount will be added to her reduced retirement benefit.
Also remember that a spouse's benefit is based on the worker's full retirement age amount at 66, not the higher age 70 benefit. But if the husband dies first, the wife will "inherit" the husband's full benefit, including any delayed retirement credits. At that point, her own smaller Social Security benefit will disappear.
Another adviser asked about this 59-year-old client who was married for 12 years before divorcing more than 20 years ago. Her ex-husband is the same age. “I believe she can file for spousal benefits on his earnings record at 62 and let her own benefits grow until 70,” he wrote.
Sorry, Charlie. Your client is too young to take advantage of the strategy of “filing a restricted claim for spousal benefits” which is only available at 66 for those born on or before Jan. 1, 1954. If she claims benefits at the earliest possible age of 62, they will be permanently reduced and subject to earnings restrictions if she continues to work.
She will be paid on her own earnings record, reduced for early claiming (72.5%) compared to 100% at her full retirement age of 66 and six months. Any excess spousal benefit would be layered on top of her reduced retirement benefit. Her spousal benefits would be worth just 33.8% of her ex-husband's full primary insurance amount at 62 versus 50% if she collected at 66 and 6 months.
(Questions about new Social Security rules? Find the answers in my new ebook.)
Mary Beth Franklin is a contributing editor to InvestmentNews and a certified financial planner.