Schulfer & Associates, LLC

Social Security Restricted Application: Consider the “What If’s”

On November 2, 2015 President Obama signed into law, the 2015 Bipartisan Budget Deal.  Section 831 contained significant changes to Social Security, which I had written about within days of the law passing as information began to surface.  Big Changes to Social Security and Important Ages for Social Security explained that “File and Suspend” is being eliminated for anyone who does not turn full retirement age (66) by April 30, 2016.   “File and suspend” allows a spouse who has reached FRA to file for benefits, immediately suspending them.  “Filing” allows benefits to be paid to either you, a spouse or dependent of yours.  “Suspending” the benefit suspends you from receiving money from social security, but your spouse or dependents still can while your personal benefit continues to grow by earning “delayed retirement credits” until the maximum age of 70. 

The law also puts limits on future claims for “restricted application”, eventually phasing out this provision as well.  The good news for many though, is that if you have turned age 62 by 12/31/2015, you will still be allowed to use the Restricted Application option when YOU turn full retirement age.  The tricky part is whether it will make sound financial sense for you to do so.  Understanding the options for claiming social security, particularly at a time when the rules are changing, can be very confusing.  It is important that I clarify that your spouse does not have to be full retirement age for you to file restricted application, which was unclear in the immediate aftermath of the law passing and as such written in Important Ages for Social Security.

To use “Restricted Application”, you must have turned 62 by 12/31/2015.  You do not have to do anything until you reach your full retirement age.  Assuming you have not already filed for benefits, you can then file a “restricted application” for your social security benefits.  This means you are submitting your “application” for benefits, but you are “restricting” them (your benefits).  You would then claim a spousal benefit which would entitle you to ½ of your husband or wife’s benefit.  The caveat is, they have to be receiving their benefit.  That is where it is important for the two of you to do your math.  If your spouse has not yet reached their full retirement age, does it make sense for him or her to claim and receive benefits early (currently, the earliest age they can claim is 62) so that you can claim a spousal benefit?  Doing this and “restricting” your benefit permits you to receive delayed credits allowing your benefit amount to grow, up to age 70.  However, if your spouse is filing early (so that you can receive the spousal benefit) they are permanently reducing their benefit, which could substantially affect them over their lifetime.  Have you considered the “what if’s”?   If they claim early so that you can delay your benefit, what if you die before your husband or wife does?  How does this affect their social security benefit for the rest of their life?  If you predecease your spouse, he or she either continues their own social security benefit which, if filing early, would be permanently reduced, your benefit (their spousal benefit), whichever is greater.  If they’ve accepted a permanent reduction because they filed early and planned on you living longer, this strategy could ultimately play out with your husband or wife receiving substantially LESS dollars over their lifetime than they otherwise would have, had they waited to claim their benefit. 

On the other hand, “what if” you both live a long life?   By filing for a restricted application at your full retirement age and your spouse filing early, you could be ahead particularly in the earlier years by allowing your benefit to grow through delayed retirement credits and collecting ½ of theirs.  Once you begin receiving benefits, your spouse could analyze their benefit and the spousal benefit option and (with current rules), file to receive their spousal benefit (based off of yours).   But again, understand that their claiming early and accepting a reduced benefit will follow them for the rest of their life (even if they receive a spousal benefit later on) unless and until you predecease them, at which time they could file a new claim based upon a survivor benefit.  Therefore, do your calculations carefully to see how this could play out.  Additionally, by receiving more dollars from social security early in your retirement, you can delay taking out of your own savings and IRA’s, potentially letting those accounts grow, which could substantially play out favorably.  Remember, the great thing about taking less out of your own personal savings and retirement accounts, is that 100% of what is left transfers to your beneficiary as an asset that they can use as they wish, in lump sums or as an income stream, OR to pass along to other beneficiaries such as surviving children.  Conversely, if you predecease your spouse, they can assume your social security benefit if it is higher than theirs, as an income stream (not an asset) which lasts for the duration of the rest of their lives only.  So, which is the best?  It just all depends.  You have to do the calculations, consider the “what if’s” and base your decision on highest probability and what will make you and your spouse the happiest.

Each individual’s and couple’s circumstances are different.  We wish it were as easy as solving an equation, but there are no perfect answers so be careful who you take advice from.  If you already work with a great financial advisor, ask him or her to help you with your social security planning.  If you do not already work with someone, be careful about receiving “free” advice.  With a system as complicated as Social Security, I would be suspicious of anyone offering free advice, especially if it comes with other “free” perks.  If you prefer to work with an advisor for advice only (but would rather they not manage your retirement accounts), ask if you can enter into a written consulting agreement with them for either a flat or hourly fee for planning.  This will help you to avoid being “sold” something you do not want in exchange for the “free” stuff you have received.  Remember, you can always call Social Security directly or visit their website for answers to your questions, and this costs you nothing! (well OK, it’s actually a service included in the program that you’ve already paid into) 

If you are making the decision on your own, my general advice is multifold.  Do the math carefully.  Consider the “what if’s”.  The decision of when and how to claim your social security benefits should also be in coordination with your retirement accounts, because each directly affects the other.

The big unknown is how long will you live and how happy you will be with your social security payments throughout the years.   This ultimately is what plays out in the overall success of your decision.

 

 

(Author’s note:  Due to industry regulations, I am prohibited from responding to any online comments. I welcome you to contact me via e-mail:  louann.schulfer@lpl.com).

LouAnn Schulfer is co-owner of Schulfer & Associates, LLC Financial Professionals and can be reached at (715) 343-9600 or louann.schulfer@lpl.com.  Find her blog at www.SchulferAndAssociates.com

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