Americans love team sports. This year, over 23 million people tuned in to watch the college basketball playoffs. What makes team sports great is seeing an individual work with their teammates to execute their plan of attack. When it comes to Social Security withdrawal strategies, a husband and wife have a few extra “plays” in their playbook.
Now before we get into the “Xs and Os”, let’s review some fundamentals. As we discussed in our first Social Security article, The Start Date Dilemma, retirees have a choice to make: take their benefit at Full Retirement Age (currently age 66), take a reduced benefit as early as 62 or delay until up to age 70 for a larger payout. You will see that these decisions not only affect your benefit but can affect your spouse as well. Many withdrawal strategies require one or both spouses to be at Full Retirement Age (FRA) in order for them to be done. It is also important to note, when a retiree begins benefits before FRA, that decision is locked in and cannot be changed.
Alright, enough with the basics, what is the game plan? The first thing couples need to be aware of is the spousal benefit. A spouse is eligible for the greater of their own personal benefit amount or a spousal benefit of half of their spouse’s benefit amount. This is likely the case when one spouse has very little or no earnings history.
File and Suspend
If Social Security really were basketball, “File and Suspend” would be the “Pick and Roll”. Here’s how it works; the primary spouse must have claimed benefits in order for the other to receive spousal benefits. With the file and suspend option, the primary spouse files for their Social Security Benefit (at FRA) but immediately suspends receiving that benefit for a later date. This allows the spouse to begin receiving spousal benefits while the primary spouse’s continue to grow.
Let’s look at some real-life play-by-play (okay, it’s made up, but you get the idea): John just turned 66 is now at FRA. Jane, his wife, is currently 62 and is considering beginning her Social Security benefits. Jane has very little earnings history so her own benefit would only be $300 per month (at age 62). John’s FRA benefit is $2,000. Since John is going to continue to work, he decides to claim his benefits and immediately suspends them. This allows Jane to claim spousal benefits totaling $720 per month (her own benefit of $300 plus 70% of the spousal benefit since she is taking her benefit early). John’s benefit continues to grow until age 70 when he can expect to receive $2,640 or more in benefits.*
Restricted Application (sometimes referred to as “Free Spousal”) works similarly to the File and Suspend strategy. This option typically works well when spouses are close in age and both have working history.
Say John and Mary from the example above are both turning 66 this year and would like to begin receiving benefits. John’s FRA monthly benefit is $2,000 per month and Mary’s is $2,400 per month. Mary could begin her benefit of $2,400 which would allow John to file a “restricted application” to receive his spousal benefit ($1,200) in this case. Since he filed for spousal benefits, his personal benefit would continue to grow until age 70 when it would then be $2,640. Then John would apply for his individual benefit.*
Restricted Application allows one spouse to receive “free” spousal benefits while they delay their own and allow it to grow. Like most Social Security strategies, it is important to reach Full Retirement Age in order to use this option. If one spouse claims before reaching FRA, they are deemed to have permanently claimed their benefit at that time.
Options for Widowed or Divorced Individuals
Some of these or similar strategies may even work for spouses that have divorced or survived their husband or wife. If you were married to your divorced spouse for at least ten years, you are still eligible for spousal benefits. Doing so will not affect their benefits in any way (won’t reduce what they receive).
These situations can be very complicated, it is imperative that you work with an advisor or Social Security expert before deciding on any Social Security strategy. Your advisor can help coach you through your personal playbook and together you can decide which option is best for you.
***New laws have been passed that impact theses strategies since the writing of this article, contact your advisor and the Social Security Administration to be sure you still qualify to use either Restricted Application or File and Suspend.***
*The examples given above are for illustrative purposes only. For more information on Social Security benefits, visit SSA.gov.