Social Security Filing Strategy Ending in 2019

Individuals turning full retirement age in 2019 are the last U.S taxpayers that can take advantage of a valuable Social Security claiming strategy, the “Restricted Application”.

The strategy lets one spouse restrict their application to spousal benefits only, giving them some Social Security income now while allowing their own retirement benefit to continue to grow by 8% a year until age 70.  At age 70, they can then switch to their own, higher benefit.

This strategy is available to married couples (and unmarried divorced spouses) where at least one is at full retirement age and one is receiving their retirement benefit.

To restrict an application to spousal benefits only, you must have been born before January 2, 1954.

To use the claiming strategy, you must be at least full retirement age for Social Security.  Those born in 1953 still have a chance to use the strategy this year as they hit their full retirement age of 66 this year.

Say a 66-year-old qualifies for a $2,400 monthly benefit, while the spouse qualifies for a $1,400 benefit. The higher earner can file a restricted application to claim a $700 monthly spousal benefit on the lower earner’s record.  The couple will bring in $2,100 a month combined from Social Security, but when the higher earner hits age 70, he or she can switch to a benefit worth $3,168.  The couple will then bring in a total of $4,568 a month for the rest of their lives, plus annual cost-of-living adjustments.

Claiming the lower earner’s benefit and the spousal benefit can allow the higher earner to delay and thus boost that more lucrative benefit.  As a result, they’ll receive additional income of $33,600 ($700 x 48 months).  And that boosted benefit of $3,168 is the one that the surviving spouse will keep after the first spouse dies.

We recently recommended this strategy to the Smiths, who both turned 66 in October 2018.  Mr. Smith’s earned income and Social Security retirement benefit is much higher than Mrs. Smith’s.  Mr. Smith also plans to continue working until he’s at least 70 and they have no need to receive social security benefits today from a cash flow perspective.

We advised Mrs. Smith to file for her full retirement benefit and Mr. Smith to file a restricted application.  Mrs. Smith is now collecting her retirement benefit and Mr. Smith is collecting ½ of Mrs. Smith’s benefit while allowing his own benefit to continue to grow until he turns age 70.

At age 70, Mr. Smith will switch to his own, higher benefit and Mrs. Smith will switch to her spousal benefit (½ of Mr. Smith’s), which will be higher than her own benefit today.

The Smith’s will receive approximately $35,000 of extra income over the next four years, which they would have otherwise foregone if they had not implemented the Restricted Application claiming strategy.

If you are a boomer who qualifies, there is no downside to the strategy and it behooves you to take a good look at when you and your spouse will claim benefits as you could easily end up with a little extra income for up to four years.

What if one spouse is younger or if I a divorced?

For a married beneficiary to use the restricted application strategy, their spouse must have already claimed his or her benefit.

If you are age 66 but your spouse is 60, you’ll need to wait at least two years to use this maneuver.  But if your spouse is, say, 68 and claiming a benefit, you can file a restricted application today for a spousal benefit off their record and let your own grow to age 70.

If a couple has been divorced two or more years, then ex-spouses are considered to be independently entitled to Social Security benefits.  As long as the couple was married at least ten years, an ex-spouse who is still single can file a restricted application for spousal benefits only regardless of whether his or her ex has claimed a benefit.

If you try to take advantage of this strategy before it disappears, be prepared if you run into confusion when claiming benefits.  Some Social Security representatives may be unaware of the strategy or think it no longer applies to anyone.  In most cases, but not all, asking for a supervisor resolves the issue.

We advised the Smith’s of this when we initially sent the Smith’s to their local Social Security office to file, but they were still told that the strategy no longer exists and left confused and without doing anything.   So we printed language directly from the social security website for them to take back to the local office and the rest is history.

Not qualifying for a Restricted Application does not mean that you have nothing to consider.

If you can’t take advantage of this restricted application strategy, that doesn’t mean it’s every man or woman for themselves.  How to take social security can affect your partner and couples can still maximize Social Security benefits by coordinating their claims.

If, for example, the high earner claims Social Security early, then that could consign a spouse to a lifetime of reduced survivor benefits.

When strategizing, consider who has the highest benefit.  Ideally, the higher earner will allow that benefit to grow until turning age 70 (or as long as they can afford to delay).  The lower earner could take his/her benefit earlier, filling an income gap while the higher benefit grows.

While dual income couples may find it easier to delay at least one benefit to age 70, single income couples typically face a harder choice.  A non-earner can’t claim a spousal benefit until the earner claims his/her benefit.  In this case, if the couple can afford to go without Social Security income until 70, they may want to wait.  If not, they should aim to delay claiming until at least full retirement age.  Taking retirement benefits early permanently reduces benefits for those who file and their spouses.

No matter what the situation, carefully run the numbers before taking benefits.  If you have questions, reach out to your ACM Wealth Advisor.

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