The Bipartisan Budget Act of 2015 (BBA) closed two popular loopholes for future Social Security benefits. As a result, certain retirees may now realize less in the way of benefits during their lifetime and leave a smaller nest egg for their heirs. But astute planning can still maximize the Social Security benefits you’re entitled to receive during your retirement years.
Social Security 101
Generally, you may receive monthly benefits based on your earnings history or your spouse’s earnings history, whichever produces the higher amount of benefits, and the age when you apply for benefits. You’re entitled to 100% of the allowable benefits if you wait until your “full retirement age” (FRA) before applying for benefits. Alternatively, you can opt for a reduced monthly benefit if you apply early or a greater monthly benefit if you wait to apply after your FRA.
The FRA, established by the Social Security Administration (SSA), is based on your date of birth. For example, the FRA for someone who was born before 1938 is age 65, the “traditional” retirement age. But it gradually increases to age 66 for those born between 1937 and 1943, reaching a plateau at 66 for those born after 1942 and before 1955 — encompassing the majority of the “Baby Boomer” generation. And for younger people, the FRA stretches even further for those born after 1954 until it reaches a maximum of age 67 for those born after 1959.
If you’re a Baby Boomer and opt for an early retirement, you can start claiming Social Security benefits as soon as age 62, although your monthly benefits will be reduced by about 30%. The reduction gradually decreases as you near your FRA. Conversely, if you delay retirement past your FRA, your monthly benefit will increase by about 8% a year until maxing out at age 70.
Congress tightens the rules
The new law ends two loopholes that enabled savvy retirees to increase their monthly benefits in the past:
File-and-suspend strategy. The SSA allows an individual worker to initially claim benefits and then suspend them, thereby continuing to earn Social Security credits until age 70. Typically, a higher-earning spouse applies for benefits at FRA and then suspends them until age 70. In the meantime, the lower-earning spouse can claim benefits based on the higher-earning spouse’s earnings history.
Under the new law, this file-and-suspend strategy ends on April 29, 2016. Thereafter, if you suspend your benefits, your spouse’s benefits will likewise be suspended. However, if you’ve already been using this method, the benefits will be “grandfathered in” under the BBA and you’ll still receive the higher amount.
Restricted application strategy. Using this technique, a spouse who’s approaching FRA and is eligible for benefits based on both his or her earnings history and the other spouse’s earnings history files a restricted application for spousal benefits only. Then the spouse waits until age 70 to apply for benefits based on his or her own history. This enables the spouse’s Social Security credits to continue to grow.
The BBA eliminated the option to file a restricted application for only spousal benefits. If you turned age 62 after 2015, you must claim all of your benefits upon filing, based on the higher amount of your own or spousal benefits. For those who were already 62 at the beginning of this year, however, the restricted application is still a possibility.
Work with your advisor
These two strategies were able to produce thousands of dollars in extra benefits to retirees. Unfortunately, you won’t be able to save as much as you could before the new law. But there’s still plenty of flexibility within the rules if you intend to retire early or wait until a later age to stake your claim. Consult your advisor to coordinate your Social Security strategies with other aspects of your estate plan to deliver the optimal results for your situation.
