What is the optimal filing strategy for social security benefits? Well, as you may suspect, it depends on a number of factors including your and (if married) your spouse's eligible benefit amount, how long you plan to work, your savings and retirement assets, pension income (if any) as well as any available "special" social security filing strategies, among others. However, one of the most critical factors to consider is life expectancy. How long you are likely to live will have a significant impact in determining your optimal filing strategy.
Obviously, no one knows exactly how long anyone will live but there are a number of important factors to consider including your own health status and family history. To be clear, the risk in retirement is not that you may die young and not get all your eligible benefits. The real risk is that you may live a long life and outlive your money. Since social security is a pension that you can't outlive, consideration should be given to maximizing this benefit in order to protect your cash flow deep into retirement.
What if you do have longevity in your family? Clearly, if your parents, grandparents and other relatives lived a long life then there's probably a good chance that you may live a long life as well. If your own health status is also good then it probably makes sense to defer the start of your SS benefits in order to maximize the value of your payment amount.
What if you don't have longevity in your family? In that case, it may make sense to take your benefit sooner even though it will be reduced in value. However, what if your spouse has longevity in her family but your benefit amount is higher than hers? In that case, it's typically better to defer the start of your benefit in order to maximize the value of your benefit. By doing so you will maximize the survivor benefit for your spouse.
What if there is a large difference in age between spouses? Generally speaking, the longer you wait to start taking benefits the higher your payment amount will be and the more lifetime benefits you will receive. But that's not always the case when there's an age discrepancy among spouses. For example, I had a married couple client who were both eligible for maximum social security benefits. If they both waited until age 70 to file for benefits they would both max out their payment amounts but, surprisingly, would not maximize their combined "expected" lifetime benefits. The reason was because the wife was 9 years younger than the husband. It turns out that they could actually get more in lifetime benefits if he delayed to age 70 but she filed early (at age 62) for a reduced amount. That would allow her to start receiving benefits earlier (albeit a reduced amount) but for more years before she ultimately switched to a higher survivor benefit. Since every situation is different you have to run the numbers in order to determine the optimal filing strategy.
What if you are a widow? If you qualify for widow benefits you are eligible to file as early as age 60 for a reduced survivor benefit amount and can then later switch to your own benefit, assuming it's higher, in order to maximize your lifetime benefits. Once again, examining what your likely life expectancy will be is critical when determining the optimal way to coordinate the best way to take survivor benefits and your own benefits.
What if you are divorced and not re-married? Under the "new" social security rules resulting from the recent Bipartisan Budget Act, you will only be eligible for ex-spousal benefits if you are at least age 62 by 12/31/15. If you do qualify then you must analyze the best way to coordinate taking your own benefits with your ex-spousal benefits. In some cases it's better to take ex-spousal benefits first and delay the start of your own benefits to age 70. However, you must take a deeper look at the many factors involved in this decision including your life expectancy. As a single person living on just one social security benefit, it's important to structure your payout plan to maximize lifetime benefits in conjunction with your other retirement assets.
Although estimating life expectancy clearly involves making a "best guess" based on family history and your own health status, it is one of the most critical components in designing an optimal social security filing strategy. The next critical step is to properly integrate social security benefits with your other retirement assets in order to maximize not only your social security benefits but also your overall retirement income.
Social security has long been an issue for women. Now, with the changes to social security as a result of the recent Bipartisan Budget Act of 2015, it appears that women are likely to be harmed more than any other demographic. The new rules governing social security filing strategies starting in 2016 make it more difficult than ever for women to maximize their benefits.
Compared to other retirement assets, social security plays a disproportionately important role in providing income for women throughout their retirement. Generally speaking, some of the key factors affecting women in retirement are that they generally live longer than men, typically have a lower social security benefit amount, are more likely to be burdened with the expense of long-term care and they struggle more financially as a result of divorce.
According to the Social Security administration, as of 2013, income from social security benefits accounted for nearly half of all retirement income for unmarried women, including widows age 65 or older. For retired women currently collecting social security, over 80% of them took their benefits early, permanently locking themselves into lower lifetime payments. For example, taking your benefits early, at say age 62 versus age 66, will result in a 25% permanent reduction in benefits. However, when surveyed, nearly 25% of respondents indicated that if they could do it over again they would have delayed the start of benefits in order to take advantage of higher lifelong benefits.
To make matters worse, the new social security rules make it even more difficult for women to maximize benefits. For example, at present, married or qualifying divorced spouses who are entitled to both their own retirement benefits and spousal benefits can elect to collect just spousal benefits if they wait until full retirement age (66 in most cases) to file for benefits. A spousal benefit is equal to 50% of the other spouse's (or ex-spouse's) full retirement age benefit amount. While collecting spousal benefits, their own benefit would increase in value by 8% per year to age 70, when they would switch to their own now higher benefit.
Under the new Budget Bill, however, the ability to temporarily claim just spousal benefits is being phased out. Married or divorced spouses who are at least age 62 by the end of 2015 will retain the right to claim only spousal benefits at age 66, assuming that their spouse has filed for benefits. Divorced spouses who were married for at least 10 years, divorced for at least two years and are currently unmarried are entitled to social security benefits off of their ex's earnings record. However, married individuals or divorced spouses younger than 62 by the end of 2015 will no longer be able to collect only spousal (or ex-spousal) benefits. They will have to take the higher of the two benefits when they file.
Another major rule change involves the elimination of a claiming strategy called "file and suspend". This allowed a worker who reached full retirement age or older to claim social security and immediately suspend his or her benefits. Currently, this would allow a spouse and a minor child to collect benefits off of the worker's record while the worker allowed his own benefit to increase by 8% per year to age 70. Under the new budget rules, their is less than a six month window to take advantage of file and suspend. Only those who turn age 66 or older by May 1, 2016 will be eligible to take advantage of this filing strategy.
The elimination of file and suspend typically harms married and divorced women in particular because they will no longer be able to collect a spousal (or ex-spousal ) benefits while allowing their own benefit to increase by 8% to their age 70. Many women have comparatively lower benefits than men because either they had lower wages than men (still a battle being fought) or they worked fewer years as a result of staying home to raise children. File and suspend offered a way for women to allow their benefits to grow and "catch up" while collecting spousal benefits. Now this opportunity is being phased out.
For single women, file and suspend offered another benefit. Say a single women filed and suspended her benefit at age 66 and allowed it to increase by 32% to their age 70. Then suppose at age 70 she found out that she was seriously ill (or even that she just needed money for some reason), she would be eligible to go to social security and have them pay her a lump-sum of money equal to those 4 years of cumulative "suspended" benefits and then start her payout as if she had filed at age 66. File and suspend offered this "safety net" for women (and men) but it is going away in less than 6 months thanks to the new budget rules.
More than ever, women need to take a closer look at planning for retirement. Given that social security is a critical component of retirement income for most women, it is imperative that women seek out advice from a qualified social security planning specialist who can help guide them through the "new maze" of social security rules. With deadlines as early asMay 1, 2016, there really is no time to waste.
The recent bi-partisan Budget Bill included significant changes which previously permitted filing strategies which allowed married and divorced couples an opportunity to maximize their lifetime benefits from social security. These legislative changes to social security have often been described as "closing loopholes for the rich" but, upon closer examination, these changes mostly appear to hurt the middle class and women. As far as I can tell, the rich are still rich and clearly not impacted by these social security changes in any material way.
These special filing strategies were originally introduced into legislation by President Clinton in the "Senior Citizens Freedom To Work Act of 2000". They allowed workers a way to receive some benefits, through spousal and ex-spousal filing strategies, while deferring the start of their own benefits to age 70, in order maximize the value of their own benefits.
These filing strategies were especially important and valuable to middle class workers and women (specifically, wives, ex-wives and widows). This is because it gave these two groups of people an opportunity to collect some benefits while they continued to work (in order to increase their savings for retirement) and also to maximize their own eligible social security benefits by delaying the start of these benefits to as late as age 70.
Here's an example of what a married couple could have done under the old rules. Let's assume that a married couple reached age 66 together and decided to continue to work until age 70 in order to increase the value of their social security benefit by 32% (an 8% increase per year from age 66-70) by delaying the start of their benefit until age 70. They could have taken advantage of a filing strategy called "file and suspend" which allowed one spouse to file for benefits but delay actual receipt of these benefits until age 70. Since, say the husband, filed and suspended his benefit, his wife would be eligible to collect 50% of the value of his benefit until age 70 by filing a "restricted application" for spousal benefits. Once they each turned age 70 they would both start their own benefits, which had increased in value by 32% from age 66-70.
This filing strategy afforded this couple 4 major benefits:
1. It allowed them to maximize their own social security benefits by delaying the start of benefits to age 70.
2. It allowed the lower earning spouse (typically the wife, but not always) to receive spousal benefits from age 66-70 while delaying the start of her own benefit to age 70, in order to increase the value of her own benefit.
3. It allowed the higher earning spouse (typically the husband) to maximize the "survivor benefit" for his wife by delaying the start of his own benefit to age 70, thereby maximizing the value of his benefit which she would receive if he pre-deceased her.
4. It allowed them to continue to work and save for retirement while still receiving some social security benefits (i.e. the spousal benefit) from age 66-70.
Under the new Budget Bill, however, many of these benefits are either severely diminished or eliminated. This is because the "file and suspend" option has been eliminated except for a short 6 month window. If you are age 66 or older by May 1, 2016 you may still be eligible for this filing option. In addition, the "file and restrict" option has also been eliminated except for individuals who are age 62 or older by December 31, 2015. (If you qualify under either of these deadlines it is imperative that you seek the advice of a social security specialist to determine what you may still be eligible for and to determine your optimal filing strategies before these deadlines pass).
In summary, other than those eligible to retain benefits under the transition rules, the new rules are most likely to result in a reduction in benefits for spouses (mostly the wife), ex-spouses (mostly the ex-wife), widows and middle class couples (married or divorced) who are, generally speaking, already struggling to meet the challenges of financing what may be a 20-30 retirement.
With so many other options available to "fix" social security, it's perplexing that the impact of these new social security rules on the middle class and women, in particular, were not more thoroughly researched and debated before rushing the new legislation through. "Closing loopholes for the rich" may be an attractive "sound bite" for some politicians but it doesn't seem to reflect the true impact of the recent legislative changes to social security.
Here we go again! Already one of the most complicated of government programs, the bipartisan Budget Bill signed last week has created a great deal of confusion and complication for those looking to social security to provide income in retirement.
Before the new legislation, there were over 2,700 rules governing social security. A typical couple had as many as 567 different flying options. Now, with the new legislation, their are even more rules and potential options depending on your age and marital status.
In broad terms, there are now basically 4 different groups of social security beneficiaries with correspondingly different sets of filing rules to abide by:
1. Those who are already collecting.
2. Those who will turn age 66 (or older) by May 1, 2016.
3. Those who will turn age 62 (or older) by 12/31/15.
4. Those who will turn age age 62 after 12/31/15
For those in group #1, there will be no changes to their benefits, generally speaking, provided that they continue to receive their benefits as is and do not voluntarily suspend their benefits. For example, if the worker from whom spousal benefits are collected against were to voluntarily suspend receipt of their benefits (eg. in order to receive an 8% annual increase in benefits to age 70) after May 1,2016, then any spousal or children's benefits paid against their record would also cease.
For group #2, those individuals who will turn age 66 (or older) by May 1, 2016, there is still a very short "6 Month Window" of opportunity to take advantage of a filing strategy called "file and suspend". For many clients eligible to do so, this filing strategy could provide as much as $50,000-$300,000 or more in additional lifetime social security benefits. After May 1, 2016, this filing option will no longer be available.
CAUTION: It is critical to note that "file and suspend" may not always be the best filing option in all cases even for those still eligible to do so. In fact, in some cases it could actually result in a loss of as much as $50,000 or more in benefits. It's critical for filers to consult with a social security income specialist before taking any action regarding "file and suspend". Just because you may be eligible to do "file and suspend" doesn't mean it will always be your best filing option.
For those in group # 3, individuals who will turn age 62 or older by 12/31/15, there remains an abundance of valuable filing options available to enhance lifetime benefits. This is because the changes to the "deemed filing rules" do not apply to this group. As a result, there remain a number of filing strategies available to provide for spousal and divorced-spousal benefits which can significantly increase lifetime benefits. This can be a very complicated area of social security income maximization planning so it's important to consult with a specialist in this area before filing.
For group #4, virtually all of the "exotic" filing strategies will no longer be available. However, it's important to understand just how valuable social security benefits still are. They typically provide for 30-60% of most filers income in retirement even without any special filing options.
It's best to think of social security benefits like a "big cake". As a result of last week's budget bill, most of the "icing" is off the cake for those who turn age 62 after 12/31/15. However, it remains a "very big cake"! For most retirees, social security remains their only true pension plan in retirement and can easily provide as much as $1 million or more in lifetime benefits for many couples in retirement.
As a result of last week's Budget Bill, it is more critical than ever to find out what your social security benefits will be under the new federal regulations, what would be the best time to file and what would be the best way to co-ordinate these benefits with your other retirement assets.
In an effort to avoid a potentially imminent government shutdown, an 11th hour budget and debt-ceiling deal was passed by Congress and the Senate last week and simply awaits the President's signature, which is expected in the next day or two.
Among the many components of this bill are significant changes to social security filing options. As a result, many of the favorable filing strategies to maximize lifetime social security benefits will be eliminated. Please note, however, that anyone currently receiving benefits based on these filing strategies will not be affected by these new social security filing rules.
The impending changes to social security filing strategies are without question the most significant changes since the "Senior Citizens' Freedom To Work Act of 2000". Although elimination of these Social Security filing strategies have often been characterized as "closing loopholes for the rich", the reality is that the groups likely to be harmed the most will be lower and middle income families and women. Here we go again! Strangely enough, the government has also indicated that it actually doesn't expect to receive any meaningful savings from elimination of these (to date) "little used" filing strategies for at least 10 years. It appears to be more of a pre-emptive strike against the waive of baby boomers entering their social security filing years.
So what were the biggest changes to the social security filing options? Basically, it was the elimination of the "file and suspend" and "file and restrict" strategies and also the extension of "deemed filing" from full retirement age (FRA) to age 70. The "file and suspend" option will end 6 months after the bill is passed. After that, if you voluntarily suspend your benefit, you will not be able to claim benefits based on anyone else's earnings record, and no one will be able to claim benefits on your record.
This change will have a broad-reaching impact on how and when you can claim Social Security benefits. For example, you can no longer file and suspend to enable your spouse to file for a spousal benefit or to enable benefits for school-age children, since filing for your own retirement benefits is usually a pre-condition for starting "family benefits".
The bill will also implement changes to a complex set of Social Security rules known as "deeming". In simple terms (prior to this bill), if you obtained your FRA and wanted to file for spousal benefits while deferring the start of your own benefits (so that your benefits could continue to increase in value) you could do so even if your own FRA benefit amount was greater than 50% of your spouse's FRA benefit amount. However, if you were between the age of 62 and your FRA, and if your own FRA benefit amount was greater than 50% of your spouse's FRA benefit amount then you would be required to take your own benefit (you would not be eligible for spousal benefits in that case).
Under the new rules, deeming is extended from FRA to age 70. Therefore, if your own FRA benefit is greater than 50% of your spouse's FRA benefit you will no longer be eligible for spousal benefits. You can only file for your own benefit. This rule will also affects divorced spouse's, which could have a devastating affect on their lifetime benefits.
Although these filing options are scheduled to be eliminated, there is currently a critical "transition period" where these generous filing strategies will still be available for new filers. This "window of opportunity" will be available for the next 6 months only. For those of you who are between the ages of 65 1/2- 70 it is critical that you contact a social security retirement income specialist to determine what your eligible benefits are. It is important to note that these special filing strategies could generate as much as $50,000-$300,000 in additional lifetime benefits for you from Social Security.
In addition, for those of you who are between the ages of 62-70 as of 12/31/15, there may also still be some valuable opportunities to utilize special filing strategies before they are eliminated. Since Security Security remains one of the few pension benefits available to most Americans, it is more important than ever to review your filing options and make sure you obtain all your eligible benefits before your "window of opportunity" closes.
Ash Ahluwalia, NSSA, CCSCA, MBA