Social Security Loopholes for Married Couples
By Josh Espinosa, CFP®, CIMA®
Most of us are familiar with the analogy of the “three-legged stool” of retirement income: (1) Social Security; (2) savings and investments; and (3) pension plans.
As the saying goes, your level of stability during retirement depends upon the combined strength of each of these three legs; and a lack of planning in one of these areas could knock out a key structural component of your financial security.
As private pensions have steadily been phased out by most employers, the remaining two legs – investments and Social Security – have become even more critical for sustaining your desired lifestyle throughout retirement.
While the reality of today’s retirement income “stool” may be more wobbly than in years past, a strategic approach to maximizing your Social Security income can compensate for the lack of a private pension plan.
Changes to the Rules
As a result of the Bipartisan Budget Act of 2015, two Social Security loopholes for married couples were closed or restricted. The legislation could impact couples who are approaching retirement age with respect to their flexibility in claiming individual and spousal benefits.
Loophole #1 – File & Restrict
Under the previous law, if you are eligible for benefits both as a retired worker and as a spouse (or divorced spouse) and are not yet full retirement age (66 years), you must apply for both individual and spousal benefits. You will receive the higher of the two benefits.
The loophole allowed some married individuals to start receiving spousal benefits at full retirement age while letting their own retirement benefit grow by delaying it.
The new law is known as “deemed filing.” By applying for one benefit, you are “deemed” to have also applied for the other. Deemed filing has now been extended to apply to those at full retirement age and beyond.
Who’s Affected: If you were born after January 1, 1954, and will be eligible for Social Security benefits both as a retired worker and as a spouse (or divorced spouse), then the new law applies to you.
Note: File and restrict is still available if you were born before 1/1/1954 and your spouse is receiving benefits.
Loophole #2 – File & Suspend
The earlier law allowed a worker at full retirement age or older to apply for retirement benefits and then voluntarily suspend payment of those retirement benefits; which allowed a spousal benefit to be paid to his or her spouse while the worker was not collecting retirement benefits.
The worker would then restart his or her retirement benefits later (for example, at age 70), with an increase for every month retirement benefits were suspended.
Under the new law, you can still voluntarily suspend benefit payments at your full retirement age in order to earn higher benefits for delaying. But during a voluntary suspension, other benefits payable on your record – such as benefits to your spouse – are also suspended.
Also, if you have suspended your benefits, you cannot continue receiving other benefits (such as spousal benefits) on another person’s record.
Who’s Affected: The new law applies to individuals who request a suspension on or after April 30, 2016, which was 180 days after the new law was enacted. In short, the file and suspend loophole is no longer available unless already doing it.
Case Study – Maximizing Social Security Benefits
Despite the recent regulations surrounding Social Security, you and your spouse can still take steps to make the most of your benefits during retirement. Let’s explore a situation where we helped one of our client families maximize the value of their Social Security benefits.
George (age 66) and Doris (age 65) are a married couple who retired and moved to Naples in 2015. George served as the chairman of a large packaging and coatings company, and Doris was a small business owner.
Prior to becoming a CAS planning client, Doris started claiming Social Security benefits at age 63. The couple has sufficient cash flow to meet their retirement lifestyle needs before accounting for their Social Security income.
Based on their situation, we recommended that George delays his Social Security benefits until he reaches age 70. Because they do not need the extra income at this time, waiting until age 70 allows the benefits to grow at a rate of approximately 8% annually (increasing his annual benefits from $2,687/year to $3,538/year.
Since Doris is already taking Social Security benefits, George can also claim half of Doris’ spousal benefit until age 70 (based on her full retirement amount).
When George reaches age 70, Doris will also be able to activate her spousal benefits based on his increased benefit. Because she started claiming benefits before reaching full retirement age, she will get the difference of her income and half of George’s spousal benefit minus the early retirement reduction.
Doris also benefits from an increased benefit should George pass away before her. In this case, she would qualify for widow benefits at George’s full amount.
Overall, this strategy will maximize their total combined benefits based on both their life expectancies.
Note: There is no “one-size-fits-all” approach to managing your Social Security income flow. Your unique circumstances will serve as the foundation for developing an appropriate strategy for you and your family.
In some instance, delaying retirement income is not the most suitable option (especially if you are considering an assisted-living housing situation, in which case current income could be a more important criterion for admission than net worth).
Our CAS team has had the opportunity to help hundreds of client families determine the best approach for claiming their Social Security benefits. Before making any final decisions about your Social Security income, we recommend speaking with your advisor to establish a sustainable cash flow plan that fulfills your needs throughout retirement.
