Last chance for Social Security claiming strategy

While the rules for claiming Social Security will get a bit simpler starting in 2024, clients will continue to need advice on the best time to claim benefits.

Time is running out for a valuable Social Security claiming strategy available to some married couples and eligible ex-spouses who were married at least 10 years before divorcing.

Individuals who were born on or before Jan. 1, 1954, may be able to file a “restricted claim for spousal benefits” that allows them to collect half of their spouse or ex-spouse’s full retirement age benefit amount while their own retirement benefit continues to grow up to age 70. The last cohort of eligible beneficiaries will turn 70 by the end of 2023.

Unfortunately, this valuable claiming strategy is not available to anyone who was born after Jan. 1, 1954. Yet advisors and their clients continue to send me questions about how they can file a restricted claim for spousal benefits to maximize their lifetime benefits — even if they’re not eligible.

Here’s an example. One reader, age 68, asked if he could file a restricted claim for spousal benefits based on his wife’s earning record and then switch to his maximum retirement benefit at 70. “Is that something I can take advantage of?” he asked me in an email.

“No, unfortunately you cannot,” I replied. “You are too young to use the restricted application strategy. Whenever you file for Social Security, you will be paid the highest benefit to which you are entitled at that age, whether on your own record or as a spouse. You don’t get to choose.”

Once the restricted application claiming strategy disappears at the end of 2023, it should be a bit easier for financial advisors to help their clients decide when to claim Social Security as part of their overall retirement income plan. Benefits will be based on their average lifetime earnings and their age when they first claim benefits.

TIMING OF CLAIMING BENEFITS

Benefits claimed before full retirement age are permanently reduced by up to 30%. Benefits claimed after full retirement age, which varies from 66 to 67 depending on birth year, earn delayed retirement credits of 8% per year for every year benefits are postponed beyond full retirement age up to age 70.

So can anyone still file a restricted claim for spousal benefits? Here’s an example of a married couple who could still benefit from this strategy. The wife is 67 and filed for her Social Security retirement benefits in January 2023. The husband turns 70 in December and has not yet claimed Social Security.

Because the wife has already claimed her benefits and because the husband was born before Jan. 1, 1954, he could file a restricted claim for spousal benefits now and receive half of his wife’s full retirement age benefit amount. Spousal benefits are worth the maximum amount if he claims them at his full retirement age. They do not continue to grow by 8% per year up to age 70, the way retirement benefits do. At 70, he could file for his own maximum retirement benefits.

In addition, because he claimed benefits after his full retirement age, he could request up to six months of retroactive benefits paid in a lump sum, dating back to when his wife first filed for her retirement benefits.

But even after the ability to restrict a claim to spousal benefits disappears at the end of this year, individuals who are eligible to claim both retirement benefits and survivor benefits based on their late spouse or deceased ex-spouse may still be able to claim one type of benefit first and switch to the larger benefit later, regardless of when they were born.

The bottom line: Survivors should try to maximize their Social Security benefits by collecting the larger benefit last, because that’s the amount that will continue for the rest of their lives and it will be the basis for future cost-of-living adjustments.

While the rules for claiming Social Security will get a bit simpler starting in 2024, clients will continue to need advice on the best time to claim benefits.

SOCIAL SECURITY KNOW-HOW

Each year, Massachusetts Mutual Life Insurance Co. quizzes near-retirees on their knowledge of Social Security, and each year their knowledge is found lacking. One of the most misunderstood aspects involves benefits for married couples and divorced spouses.

The results of the latest quiz found more than a quarter of respondents (28%) didn’t know that if they have a spouse, the other spouse can receive spousal benefits if those are larger than their own retirement benefit. And 44% didn’t know that if they get divorced, they might be able to collect Social Security benefits based on their ex-spouse’s earning history.

More than one-third of respondents (35%) incorrectly believed that if their spouse died, they would continue to receive both their own retirement benefit and their deceased spouse’s full benefit. In fact, the surviving spouse could collect the larger of the two benefits and could even switch from one benefit to the other but would not be able to collect both benefits at the same time.

It looks as if there will continue to be a demand for Social Security planning advice in 2024 and beyond.

(Questions about new Social Security rules? Find the answers in Mary Beth Franklin’s 2023 ebook at MaximizingSocialSecurityBenefits.com.)