By Griffin Geisler, Manager of Retirement Income Planning, RBC Wealth Management-U.S.
Two popular strategies that have enabled married couples to maximize their monthly Social Security benefits will soon be off the table for some retirees, thanks to recent changes brought about by Bipartisan Budget Act of 2015.
Known as “file-and-restrict” and “file-and-suspend,” the two benefits-claiming strategies were effectively eliminated for many people late last year in a provision included in the federal budget bill.
While the changes won’t impact all retirees, they may require immediate attention for those who planned to take advantage of the income-boosting tactics before they expire. For others for whom retirement is still a year or two off, it will likely mean that they’ll need a new approach.
The timing of the phase outs are different for the two rules. Congress gave couples until April 29th, 2016 to take advantage of “file-and-suspend” while “file-and-restrict” will continue to be available as long as you were born prior to January 2nd, 1954.
While younger workers have all but written off Social Security benefits as a means of funding their retirement, Baby Boomers continue to rely on the program. Late last year, an RBC Wealth Management survey found that 83 percent of Americans ages 55 and older think they will need to rely on Social Security benefits when they retire.
Boomers are also the most optimistic that benefits will be available to them when they are ready to leave the workforce, which could make the elimination of file-and-restrict and file-and-suspend a particularly tough pill to swallow.
And for some couples, the ability to use these strategies can result in big money.
File and suspend is a particularly popular strategy among middle-income couples heading into retirement. Take for example a married couple, in which both spouses are of full retirement age (66 for most current retirees) and one person is the primary breadwinner. Under the old rules, the primary earner was able to file and immediately suspend payment of Social Security retirement benefits, thereby triggering the availability of a spousal benefit for the lower earning spouse while allowing the higher earner to continue earning delayed credits on their own benefit (8% per year) to the maximum at age 70.
Married couples who were contemplating this option could lose as much as $60,000 in benefits over a four year period as a result of the elimination of the file-and-suspend strategy.
File and restrict, meanwhile, was commonly used when one person in a married couple qualified for benefits on their own as well as a spousal benefit. After reaching full retirement age (66 for most current retirees), one spouse would file for benefits but restrict the scope of that application to the spousal benefits they are entitled to at that time. This allowed the filer to claim the spousal benefit and continue to earn delayed credits at the rate of 8% per year until they claimed their own benefits at age 70.
Given how much couples stand to lose when these two claiming strategies sunset, it’s a good idea for those contemplating retirement to work with a financial professional to determine whether one of the expiring claiming strategies would make sense for them and, if so, whether they should accelerate their filing timeline in order to capture those benefits or if they need to rethink their retirement strategy altogether.