Retirement | August 12, 2016

Social Security Strategies for Couples: Rule Changes

Changes to Social Security: What You Can Do

Dear Carrie,

My husband and I are both 64 years old and still working. Because his salary is quite a bit higher than mine, he planned to “file and suspend” his Social Security benefit in two years so that I could collect a spousal benefit while his own benefit continued to grow. We understand that is no longer allowed, but we haven’t been able to come up with a new strategy. Can you help?

—A Reader

Dear Reader,

I think it’s fair to say that last year’s Budget Act dramatically shifted the landscape for couples attempting to maximize their Social Security benefits. Just when many of us had plans in place, we’ve been forced to reevaluate.

Let’s start by outlining what’s changed.

No more file and suspend

First, as you indicate, the old “file and suspend” strategy is gone for all Social Security recipients. In the past, one spouse could file for benefits, which would allow the other spouse to file for a spousal benefit; then the first spouse would suspend his or her own benefit, allowing it to grow. Now, when a married person suspends his or her own benefit, the benefits of the other spouse are also suspended. This effectively prevents one spouse from collecting benefits on the other spouse’s record while at the same time accruing delayed-retirement credits.

Further limitations on a restricted application

The “restricted application” provision allows one spouse to collect a benefit based on the other spouse’s work record as opposed to his or her own record—but only after the other spouse files for benefits.

That option hasn’t been completely eliminated, but whether or not you can use it depends on your age. The good news for those who were born before January 1, 1954, is that they are grandfathered into this provision. However, anyone who is younger is not eligible.

In this way, at full retirement age (66 for those born between 1943 and 1954), a married person can file for a spousal benefit only (a restricted application) and then switch to his or her own increased benefit at a later date.

Couples strategies that still work

So where does this leave you—and the millions of other couples who are grappling with the new rules? There’s no one recommendation because each couple’s financial situation, birth dates, relative ages, anticipated longevity, and earnings records all factor in. Because of this complexity, it generally makes sense to consult a financial advisor before making a decision. Following, though, are a few guidelines:

  • A primary breadwinner should consider delaying filing to age 70. Assuming good health and the prospect for a long life, this delay makes sense for a couple of reasons. First, it can eventually add up to a larger lifetime benefit. And second, it will mean an increased benefit for a surviving spouse.
  • It often makes the most sense for lower-earning spouses to file for their own benefit at full retirement age. The tactics will vary, however, depending on birthdate:
    • If the higher earner turned 62 before the end of 2015 (like your husband), at full retirement age he or she can file a restricted application for spousal benefits once the lower earner files. The higher earner can then switch to his or her own higher benefit at age 70. In addition, provided that the lower earner waited to full retirement age to file for their own benefit upon their spouse’s filing at age 70, they can switch to a spousal benefit if it is higher than their own benefit.
    • If the higher earner did not turn 62 by the end of 2015, and is therefore not eligible to file a restricted application, the lower earner should still consider filing for his or her own benefit at full retirement age. Higher earners should file at age 70, at which time lower earners can switch to a spousal benefit if it is higher than their own benefit.
  • Alternatively, if both partners have equivalent earnings records, it may make sense for both to delay filing until age 70—provided that both anticipate a long life and can afford to postpone benefits. In this way, they maximize both retirement benefits for themselves and survivor benefits for each other.
  • Married couples with a single income face a different set of issues. Although health and anticipated longevity certainly come into play, it often makes sense for the breadwinner to postpone benefits until age 70. The couple will forego spousal benefits until the earner files, but it will also allow for the largest possible retirement and survivor benefits. Other couples, however, may want the earner to file once the spouse reaches full retirement age, which is when the spousal benefit maxes out. In this case, though, they are forfeiting the highest survivor benefit.

No easy answers

So there you have it—or at least a taste of it. While the new law in some ways simplified things, in other ways it just made everything more complicated.

I strongly advise every person approaching retirement age to stop and carefully assess their Social Security choices. Timing is important and there are still strategies—especially for couples—that can result in a higher overall benefit. Sit down with your advisor to run different scenarios and consider the trade-offs. It’s well worth it.

Carrie Schwab-Pomerantz, CFP®, is President of Charles Schwab Foundation and Senior Vice President of Schwab Community Services at Charles Schwab & Co., Inc.