Sun, 15 Nov 2015
File-and-suspend may be kaput, but retirees can still maximize their benefits through delaying and taking advantage of spousal benefits, says Baird's Tim Steffen.
Christine Benz: Hi, I'm Christine Benz for Morningstar.com. The recently passed budget deal closes the door on a popular Social Security technique. But some other Social Security maximization strategies remain available. Joining me to discuss this topic is Tim Steffen--he is director of financial planning at Robert W. Baird.
Tim, thank you so much for being here.
Tim Steffen: Thank you.
Benz: The recently enacted budget deal closed the window on some advanced Social Security strategies that were in play. I'd like you to quickly outline a couple of the major ones that are affected here. File-and-suspend is the one that has everyone buzzing. Let's first talk about what that strategy is--and it is still available to people who are already using it. Let's talk about what's going to be changing there.
Steffen: So, the idea behind file-and-suspend is it that was a way to get the best of both worlds. For a married couple, in order for one spouse to be able to take benefits off of the other spouse's earnings history, the working spouse had to file for benefits on their own and then the nonworking spouse could take a spousal benefit. But if that working spouse didn't want benefits on their own, they would then suspend them. So, you would be able to delay the start of benefits for the worker, but the nonworking spouse would be able to take the spousal benefit. And that was the whole strategy. File-and-suspend was a way to maximize benefits across a married couple.
The technique is technically still out there, but the idea of being able to file-and-suspend is going to go away roughly six months from now. So, roughly the end of April or early May of 2016 is when the technique itself is going to go away; you won't be able to do a file-and-suspend anymore. And really, while file-and-suspend will still be available, what's going to happen is if the worker files and suspends their benefits, anybody else who is taking benefits off of them is also going to have to suspend. So, in the past, the worker would suspend but the spouse would continue to take benefits. Now, if the worker suspends, the spouse has to stop as well.
Benz: Another strategy that had been in play was restricted application. Let's talk about that and what's changing there.
Steffen: Restricted application was kind of the second half of the file-and-suspend strategy. So, if you had a married couple where one spouse maybe is eligible for a benefit off of their own earnings history but is choosing to let theirs continue to defer out until age 70, they could take a benefit off of their spouse as early as age 66--or full retirement age. They could take that for a while as their own continues to grow. So, that's what the restricted application is. When you go into the Social Security Administration office, you say, "I'm going to restrict my application to just a spousal benefit; I'm not going to take my own now."
That technique, again, is technically still going to be available, but it's only available for somebody who turns 62 by the end of 2015. Now, you still can't do the restricted application until you hit full retirement age, which is 66. So, even though the law is changing, it's still going to be around for a while, and we're still going to have people who will, four years from now, be able to take advantage of this. But if you're not 62 by the end of 2015, it's going to be off the table for you.
Benz: So, these were major strategies that couples were using to try to maximize their lifetime benefits. Let's talk about how people can regroup in the wake of this news. What are some strategies that are still viable and still out there that people should consider taking advantage of to try to maximize those lifetime benefits?
Steffen: The one that most people focus on when it comes to Social Security is when to start taking benefits. You've got this big window of time when you can take them. Most people think of full retirement age as 66--and for most people, that's right. But you've got years before that when you can take it early or you can defer the start out until later. So, you've got this window from age 62 to 70 when you can take benefits, and the question is when does it make sense to start? And there are a lot of variables that go into that, which we try to work with clients in helping them understand the impact of those; but probably the big decision point right now is when to start taking benefits and which one is optimal for you and for your spouse.
Benz: So, obviously, there are a lot of moving parts in making good decisions there. Are there any pieces of advice that you can offer to people who are trying to figure this out? I think a lot of people have heard delay, delay, delay. Is that usually or always the right answer?
Steffen: The way that actuaries have calculated the Social Security benefits, they've basically said that if you're going to live to roughly age 80, you're going to get the same cumulative benefit whether you start at 62, 66, 70 or anywhere in between. So, age 80 is kind of the break-even point. If you think that, based off of your own personal health and your family history, you're going to live past age 80, you'll likely end up with a larger cumulative benefit over your lifetime by having delayed the start. And age 80, these days, doesn't seem like all that big of a hurdle. We talked with a lot of clients about the benefit of deferring the start. We get a little bit of pushback from some people who are concerned about the future of the Social Security system and think, "Maybe I better get out of it what I can while I still can." While I understand that approach, I still think it's unlikely that they are just going to stop making payments. That's not realistic, I don't think. So, there are still a lot of advantages to delaying the start.
Benz: One of the advantages that is, perhaps, underdiscussed is the effect of delaying on the survivor benefit. Let's talk about that.
Steffen: Absolutely. So, we talked about how if you're going to delay the start of your benefits, you should look at your own life expectancy. But remember that upon the one spouse's death, the surviving spouse may be able to step right into what the decedent's spouse had been receiving for benefits. So, even though maybe you don't look at your life expectancy being really long and you may not make it to 80 based on family history and personal health, you may decide, "Well, I'm not going to get the full benefit of having delayed the start, but my spouse will." So, the surviving spouse will, in most cases, just step right into what the deceased spouse was receiving and can continue that larger benefit that you got by waiting. So, even though it may not benefit you on your own benefits, you can do a lot for your surviving spouse by delaying the start.
Benz: The file-and-suspend maneuver was really attractive to couples where you had one higher-earning spouse and one lower-earning or perhaps nonearning spouse. What avenues are open to couples who fit that profile?
Steffen: The one thing to keep in mind is that the whole idea of spousal benefits has not changed. So, if you've got a married couple where one spouse worked and one didn't, that nonworking spouse is still eligible for a spousal benefit off of the working spouse--still equal to 50% of what the worker was receiving. That's not going away at all. All that's really going away is a maximization technique that allows you to get the best of both worlds.
So, for most people, there is still the decision of when to start--early or late--and then when does the spouse begin to take benefits as well. And remember that a spousal benefit is also subject to a haircut if you take it early. But once you get to full retirement age, there is no advantage to delaying the start of a spousal benefit. You don't get the 8% per year increase that a worker would get, for example. So, if you've got a married couple and one spouse is already taking benefits, once the other spouse gets to full retirement age, you really ought to start looking at taking that spousal benefit at that point. There is no advantage to delaying it.
Benz: Tim, it's a complicated topic. Thank you so much for being here to share your insights.
Steffen: Always. My pleasure.
Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.