Married couples have no shortage of options for deciding when to collect Social Security benefits.
But the budget deal that President Obama signed into law recently gets rid of one of the key strategies that has increased lifetime Social Security benefits by up to roughly $60,000 for some high-earning couples.
The strategy is known as file-and-suspend, in which one spouse could file to receive Social Security retirement benefits and then suspend the payouts. That allows both people to delay their personal Social Security retirement benefits while one person collects spousal benefits based on the other’s work history.
The couple could essentially live off the spousal benefits and other savings until they could both receive larger Social Security retirement benefits at age 70. (Social Security retirement benefits grow by about 8 percent for each year beyond full retirement age that a person delays collecting, up until age 70.)
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The move had come to be known as a loophole because it allowed couples to collect some cash from Social Security while still growing their benefits. Higher earners collecting the maximum Social Security received the largest payout from the strategy, but all workers could use the approach to boost their income in retirement, says Laurence Kotlikoff, a professor at Boston University and co-author of “Get What’s Yours: The Secrets to Maxing Out Your Social Security.” “It was helping a lot of people,” says Kotlikoff.
Under the new rules, retirees will only be able to claim spousal benefits if their spouse is already collecting Social Security retirement benefits. And people will only be able to receive either their own benefit or their spousal benefit, whichever is greater. Retirees will no longer be able to receive only spousal benefits first and then switch to their own retirement benefits later on.
Similarly, divorced people will only be able to collect their benefit or benefits based on their ex-spouse’s record, whichever is greater. Like spousal benefits, current rules let divorced people collect ex-spousal benefits while allowing their own benefits to grow until age 70.
Retirees still have some time to evaluate their options, says Bill Moran, a senior vice president in wealth management with Merrill Lynch. The change will kick in about six months from now, meaning people age 66 and older, or who will turn 66 during the next six months, still have time to file and suspend their benefits. And people who are already using the strategy to collect spousal benefits alone can keep doing so.
The rule also makes an exception for people who are 62 now or who will turn 62 this year. They’ll still be able to claim spousal benefits alone after they reach their full retirement age, and then collect their own larger benefits at age 70.
Married couples will still have other strategies to take advantage of, to maximize their Social Security benefits, advisers say. Each spouse can still use the basic strategy of delaying their retirement benefits until age 70, to receive the larger payments. But if the couple can’t afford for both people to wait, one spouse can collect his or her Social Security retirement benefits first while the higher earning spouse delays benefits until age 70, Moran says. That could grow the higher earner’s monthly benefits and later ensure a greater survivor’s benefit.
Of course, delaying benefits only pays for people who live long enough to make up for the benefits they would have received had they started collecting earlier. Someone who waits until age 70 to start collecting Social Security retirement benefits would need to live at least until age 80 to come out ahead and have more money in total than if he or she had started receiving reduced benefits at age 62.