The federal budget recently signed by President Barack Obama made changes in Social Security that require a few updates to a series of posts we did this summer on how to make the most of your federal retirement benefits.
Boston University's Laurence Kotlikoff, co-author of the best-selling "Get What's Yours: The Secrets of Maxing Out Your Social Security Benefits" and creator of the MaxemizemySocialSecurity website, gave us the new lay of the land.
The biggest change is the end of the popular "file-and-suspend" Social Security claiming strategy I recommended for some two-earner couples. The tactic enabled a primary wage earner to file for Social Security benefits, but suspend or delay receiving them. That, in turn, allowed a spouse or eligible children to collect benefits based on the primary earner's contributions to the system while the earner deferred collection so his or her benefit would continue to grow.
(There is an exception to the end of the program: Couples can continue to use file-and-suspend for the next six months if the primary earner reaches 62 by Jan. 1 and the spouse who will collect the benefits is at least 66.)
Even with the demise of file-and-suspend, it will still be possible to suspend your Social Security benefit starting at full retirement age and restart it at a much higher level at 70. But you will no longer be able to unsuspend your benefits and receive a lump sum payment for the period it was suspended. Here's the rest of the story:
- Act Before April 29, 2016, if you're going to reach 66 by May 1, to be grandfathered into the current system and be permitted to collect benefits while your spouse's benefits are in suspension.
- Don't give up on optimizing your benefits. The loss of file and suspend is a big deal - but it's not the whole enchilada, says Kotlikoff.
"The really big gain from maximizing your lifetime Social Security benefits wasn't from the free spousal benefit but from patience in waiting for your own benefits to grow," he said.
For example: Say you've got a 60-year-old couple, both high earners, thinking of taking their benefits at age 62. If they go ahead with that plan, they'll get about $1.2 million in benefits (total, at present value). Before the change, if they had optimized - with one filing and suspending and the other taking spousal benefits at age 66, they would have gotten $1.6 million - but only $50,000 of that would be in spousal benefits. Waiting will still net them an extra $350,000, Kotlikoff says.
- If you have a higher earner married to a much lower earner, there are still a number of questions you'll need to answer when it comes time to take benefits. Should you take your own retirement benefit before 70 to activate a spousal benefit for your partner? And should your partner take their retirement benefit before you file for yours, which permits them to start receiving their spousal benefit instead?
"Before spouses could make decisions independently. Now it's more complicated," Kotlikoff says.
- It's important to note: Nothing has changed for widows. Singles can't file and suspend with the understanding that they can get a retroactive benefit if they need it. But if they took their retirement benefit early, they probably should try to suspend it at full retirement age and restart it at 70 in order to raise it substantially. If you're divorced and don't have an amicable relationship with your ex, watch out. If your ex files and suspends, the law prohibits you from collect spousal benefits on his record.
- Finally, the new rules provide a big and odd incentive for couples who will be 62 before the end of the year but are both too young to take advantage of the file-and-suspend strategy. If they get divorced, they can collect full spousal benefit at full retirement while waiting till 70 to collect their own retirement benefits. This could bring in an extra $120,000 at the max, which far exceeds the cost of an amicable divorce. After living in sin, the couple could then remarry at 70 when they start taking their retirement benefits.