History proves that if you keep your eye on the huge baby boomer generation, you’ll know what the next 'Big Thing' will be.
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And if you're curious what's next, here’s a hint: The oldest of these 76 million individuals have either just started or are approaching retirement. Which explains why Social Security is suddenly a sexy topic.
If you think back to when your parents or grandparents began receiving Social Security it was a pretty straightforward process: Step 1. You retire from working. Step 2. You file for Social Security.
Nowadays, the decision on when to take Social Security involves more moving parts and requires careful planning. A major reason is the fact that today it is far more likely that both spouses work(ed) outside the home. In addition, each may have earned a substantial benefit. This means that as a couple, you need to consider how to coordinate your benefits filing. At what age should each of you each apply? Would your total benefit be larger if one spouse started before the other? What are your options?
If you postpone filing so that your future benefit will be larger, you need to consider whether you have other resources you can draw on to cover your expenses in the interim. Perhaps it would be a good idea to tap your IRA or 401(k) account before 70½- the age at which mandatory withdrawals must start.
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There are more options for claiming Social Security today than in the past. Take the Delayed Retirement Credit (DRC) for instance: It increases your benefit for each year beyond full retirement age (FRA) that you delay claiming. When it was first introduced as part of the 1972 Amendments to Social Security, the annual credit was 1% up to age 72.
As part of the Social Security Amendment of 1983, the rules governing the Delayed Retirement Credit were changed. The latest age at which DRCs apply was reduced to 70. And, for the first time, the size of your DRC is tied to your birth year. It ranges from 4.5% for those born in 1930 to 8% for anyone born in 1943 or later. This means that today’s retiring baby boomers can boost their benefit by 8% for every year past age 66 that they postpone filing.
The DRC Pay-off
The impact of waiting is significant. Starting your benefit at 70 (instead of 66) means that your monthly check will be at least 32% larger. Plus, in addition to Delayed Retirement Credits, your benefit amount is also increased by whatever annual cost-of-living adjustments (COLAs) Social Security recipients receive over those years.
One strategy to take advantage of this is called “File and Suspend.” Spouse A (usually the individual with the larger benefit) files for Social Security and states he/she wants the benefit “suspended.” Even though Spouse A is not getting any money, this enables Spouse B to qualify for a spousal benefit. (You’re not entitled to a spousal benefit until your spouse files). As long as Spouse A’s benefit is suspended, the other earns DRCs.
Another approach goes by the term “File and Restrict the Scope of Your Benefit.” Here, Spouse C files and receives his/her own retirement benefit and Spouse D files and tells Social Security to “restrict” the benefit to just the spousal amount. (You cannot receive both your own and a spousal benefit at the same time.) At age 70, Spouse D tells Social Security to drop the spousal benefit and switch on his/her own benefit- which is at least 32% larger thanks to DRCs.
The above two strategies are only available to individuals who are at least full retirement age at the time they initially file for Social Security.
There are two important things to keep in mind:
1. Only your own Social Security benefit- that is, the one based upon your personal earnings history- can earn delayed retirement credits.
Conclusion: There is no upside to delaying the onset of a spousal or widow(er)’s benefit beyond full retirement age.
2. Delayed retirement credits stop once you reach age 70- even if you continue to delay taking a benefit.
Conclusion: There is no gain from postponing the start of Social Security beyond age 70.
The Combo Two-Step
You may have noticed that with both of the above strategies, only one partner earns Delayed Retirement Credits. However, by combining these two options, it is possible for both spouses to boost their benefit. Here’s how it would work:
At FRA, Spouse A Files-and-Suspends. This entitles Spouse B to receive a spousal benefit. If Spouse B is at least FRA, she files and restricts her benefit to just the spousal amount.
Note that at this point, one spouse is receiving a Social Security benefit, so there is some money coming in. However, neither spouse has started taking their own benefit.
When each spouse reaches age 70, they tell Social Security to start sending the benefit they earned based upon their own work history. Since each has delayed the start of their own benefit for four years, the amount each receives will be at least 32% larger than if s/he had started at full retirement age.
If you’d like to see whether you might benefit from any of these strategies, you can try speaking with someone at Social Security. The feedback I get, however, is that there’s a good chance the representative you are dealing with will not know what you are talking about. But don’t give up; keep asking to speak with a supervisor until you reach someone with enough experience to help you.
An alternative is to seek out a financial advisor who has the software to run some scenarios for you.
Too Good To Be True?
Only a minority of couples are currently taking advantage of File and Suspend or File and Restrict. An obvious reason is that few people are aware that these strategies exist. However, a bigger factor is that few retired couples have the right combination of ages and a sufficient amount of other resources to enable them to delay starting Social Security.
Nonetheless, if the Obama Administration has its way, some or all of these strategies could disappear. Its 2015 budget proposal calls for eliminating them. However, it is unclear whether this would literally take an act of Congress. If that is the case, revocation would be less likely. Presumably, if there is a change in the regulations, there would have to be some provision for individuals who have already adopted these strategies.