A Social Security Claiming Strategy to Consider

SSA-image-2My Comments: Every choice when it comes to filing for Social Security benefits comes with trade-offs. Whether one works for you to a large extent is determined by how long you live, and for most of us, that’s the elephant in the room. But if you assume you and your spouse will live to a normal life expectancy, this one might make sense for you if your circumstances fit the pattern.

by Joe Lucey on May 17, 2016 on MarketWatch

The 2015 bi-partisan budget act killed the “File and Suspend” as of April 29. But that doesn’t mean the end of smart Social Security election options that could add significant dollars to your Social Security income in retirement.

If you and your spouse were born on or before Jan. 1, 1954 — meaning you are both 62 years of age or older as of Jan. 1, 2016 — and both qualify for social security benefits this strategy could work for you.

It’s called “restricted application,” but is more accurately described as a “spousal claiming strategy”.

Here’s how it works.

When you are claiming social security benefits, you have three basic options:
• You can claim your benefits at age 62 early with a penalty (up to 25% less than your full benefits).
• You can claim your benefits at full retirement age (66 or 67 depending on when you are born) with no penalty.
• You can delay claiming your benefits up to age 70, with every year you delay adding an additional 8% to your monthly benefits.

But when you use “Restricted Application”, you get a valuable fourth option that allows you to claim spousal benefits without having to claim your Social Security benefits (yet).

Not only will you max out your social security benefit by delaying it until 70… but you’ll also get income while you wait for it to mature.
Essentially, you get paid extra to wait.

Let’s look at an example

Jack and Jill are married and just happen to be born on the exact same day. Today is their 66th birthday and they are ready to retire now that they have both reached full retirement age.

Jack is an engineer at a large company and Jill is a schoolteacher at the local high school. Jack has a Social Security benefit of $2,400/month and Jill’s is $2,000/month.

Their initial plan was to claim their full benefits as is and call it a day, but see how this strategy would boost their retirement income.

f they claim their full benefits, they would receive $4,400/month (or $57,600/year). For the remainder of their retirement, they would continue to receive $4,400/month.

But what happens if Jack uses “restricted application” to delay his benefits until 70 and claim his spousal benefit (which is 50% of Jill’s full benefit) instead? In the short term, Jack and Jill will earn less. But once Jack turns 70, he will now begin to claim his own Social Security benefit that has now increased to $3,168/month meaning the couple will now earn $5,128/month.

That means Jack and Jill will be earning an extra $9,216 every single year.

Seeing as how many retirees are living much longer than they used to, this makes a significant difference over a 30-year retirement.

The “restricted application” strategy wont produce more total income until the 12th year of retirement, but over 30 years winds up producing $172,416 of additional income.

Additionally, if we assume that Jill is going to outlive Jack, this also increases the survivor benefit for Jill meaning she will continue to $5,128/month as a widow.

Making this strategy work for you

Keep in mind that retirement planning is all about trade-offs. Not all strategies make sense for all couples, but it’s important that you explore your options. Otherwise, you might just be missing out on tens or even hundreds of thousands of dollars you could be enjoying in retirement.

Like any investment strategy, a variety of other factors — pensions, annuities, investments, savings, life expectancy, and taxes to name a few — need to be considered when deciding what will work best for you.

Before making any decisions about what to do with your social security, I strongly recommend you speak a financial professional familiar with social security and retirement income planning.

It’s extremely difficult to undo your Social Security claiming strategy once you make your selection, so make sure you do this right.