(This a guest post submitted by the CFP Board)
Washington, D.C., November 12, 2015 – For many Americans, retirement is something to look forward to – a time to celebrate years of hard work, enjoy family and friends, and embark on new adventures. But filing for government retirement benefits can be daunting, and new Social Security rules recently signed into law as part of a larger federal budget bill promise to add to this complexity by eliminating two claim filing strategies: file-and-suspend and restricted applications for spousal benefits.
A recent contribution to LetsMakeaPlan.org describes some of the most common mistakes that can keep people from maximizing their Social Security retirement benefits and how to avoid them, while accounting for changes introduced by the new law.
- Not filing for a spousal benefit because you earned more than your spouse: If you reach your full retirement age during or before 2019 and your spouse has already filed for benefits, you can build wealth by waiting until age 70 to collect your own retirement benefits and filing a claim at your full retirement age restricted to spousal benefits only. This allows you to collect two benefits sequentially.
- Filing at 62 because you need the income, but no longer working because your benefit will be reduced by the “Earnings Test”: Your benefits may be reduced based on the wages you earn after filing, but they will be repaid at full retirement age pro-ratably over your remaining life expectancy. Additionally, continuing to work can have the effect of increasing your annual benefit going forward.
- Filing at 62 because you think you may die young: The “breakeven” age – when the gain from deferring benefits becomes higher than the gain from taking benefits early – is in the mid-80s for a single person. For married couples, however, there is a high probability that at least one person in the couple will make it into his or her 90s. Thus it generally makes sense for the high earner of the couple to delay benefits until age 70, since this increased benefit will determine what is paid to the longest-living spouse, either as a retirement benefit or a survivor benefit.
- Pushing your spouse to take benefits at full retirement age so you can get spousal benefits: If your spouse is at or will reach full retirement age within six months of the new law’s enactment (Nov. 2), he or she can file and suspend at full retirement age up until the end of the six-month period and delay his or her own claim until 70. This strategy enables you to get a spousal benefit while also increasing your spouse’s benefit.
- Taking benefits too early: You may be able to repay your benefits if you have been receiving them for less than a year and start them over later, at a date when they will no longer be subject to an early payment reduction. If you are now 66 or older, or will be 66 within six months of Nov. 2, you can suspend those reduced benefits upon reaching age 66, and let them accumulate delayed credits until age 70.
- Assuming “file-and-suspend” is only for married couples: Single people who are or will turn 66 within six months of Nov. 2 can file and suspend at any point within that timeframe, once you reach full retirement age. This allows you to essentially bank those benefits and earn 8 percent annually until age 70, and gives you the option to request suspended benefits in a lump sum.
Don’t let Social Security filing become an overwhelming task that sours the start of a hard-earned retirement. Locate a CFP® professional near you who can guide you through the Social Security claims process and develop solutions that make the most financial sense for you.
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