There's a new world order when it comes to claiming Social Security benefits. In late 2015, Congress axed two popular strategies that helped couples maximize benefits. But all's not lost. It's just time to turn to Plan B.
Married couples can still make the most of basic Social Security benefits, especially by coordinating the timing of their claims. The first step is for both spouses to get their projected monthly income estimates from the Social Security Administration. Once they see how their benefits compare, they can take the next steps to maximize household income.
Depending on their ages, some couples may be able to use the "file and suspend" and "restricted application" strategies. Both strategies enable the higher earner to postpone benefits and earn lucrative delayed credits -- while the couple can take advantage of the spousal benefit and boost the survivor benefit.
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Those age 66 or older by May 1, 2016, can "file and suspend" a retirement benefit by April 30, 2016. By filing for and immediately suspending the higher earner's benefit, the lower-earning spouse can claim a spousal benefit while the higher earner delays taking his benefit up until age 70.
Seniors age 62 or older by January 1, 2016, can file a "restricted application" for spousal benefits only. At full retirement age, this beneficiary can apply for a spousal benefit, while allowing his own benefit to accrue delayed retirement credits. (A caveat: If you already filed and suspended your benefit, you cannot file a restricted application.)
People age 61 or younger as of January 1, 2016, are not eligible to use either strategy. (For details on using these strategies if you qualify, read Big Changes Ahead for Claiming Social Security.)
If you are no longer eligible, experts say the best strategy continues to be having the higher earner delay until age 70. By doing this, the couple can boost the survivor benefit as well as the lifetime inflation-adjusted income stream. A worker's benefit earns 8% in delayed retirement credits for each year the beneficiary delays past full retirement age up to age 70. "Ideally, the person with the higher benefit should wait the longest," says Gail Buckner, a vice-president at Franklin Templeton Investments. "Where else can you get a guaranteed 8% return?"
And a surviving spouse can get 100% of that boosted benefit if she claims it at her full retirement age or later. "Delaying Social Security as long as possible is one of the best ways to ensure a stream of income for the surviving spouse," says Scott Thoma, retirement strategist at Edward Jones.
One-earner couples may lose the most under the new rules, says William Reichenstein, a professor of finance at Baylor University, in Waco, Tex., and a principal of consulting firm Social Security Solutions. Consider the file-and-suspend strategy under the old law. Say both spouses were full retirement age at 66. The higher earner who wanted to delay could file for his own benefit, and the spouse who did not qualify for benefits based on her own earnings record could then file for a spousal benefit of up to half of the worker's benefit. The higher earner would then suspend up until age 70.
Now this higher earner will soon no longer be able to file and suspend in order for the lower earner to claim a spousal benefit. If the higher earner wants to delay until 70, his wife will have to wait to claim her spousal benefit until he files at that age.
With the new regimen, the cumulative lifetime benefits of these one-earner couples would be higher if they did not wait until 70 to apply, says Reichenstein. These couples may be better off collecting a couple of years earlier.
Couples have more flexibility when the lower earner qualifies for even a small benefit of her own. In that case, the "lower earner may want to take a benefit earlier" -- even as early as age 62 -- and bring some extra income into the house, while the higher earner waits until 70 to collect, Reichenstein says. Run the income numbers at different claiming ages before deciding when the lower earner should claim.
Equal-earner couples will need to reassess their plans, too. The nixed strategies helped many couples apply for a spousal benefit while both spouses earned delayed retirement credits. Now, if both spouses want to delay, they will get no benefits until age 70.
Equal-earner couples may want to consider starting the lower of the two benefits sooner. "Even with equal earners, chances are one spouse's benefit will be higher," says Judith Ward, senior financial planner for T. Rowe Price. Starting the lower benefit would "provide some income in the sixties," she says, while the higher earner delays.
Filling the Income Gap
If you had planned to use at least one of the strategies and would like to delay, take a look at options to fill that income gap. First, says Lynn Nolan, director of retirement planning services at Penn Mutual Life Insurance Co., rerun your Social Security calculations under the new rules. "See what the shortfall will be," she says.
One option may be to work longer than you planned. With the maximum spousal benefit currently at about $1,320 a month, even a part-time job could help fill that gap, says Sarah Koth, a Social Security expert on the Voya Financial Advisors Advanced Planning Team.
You could consider tapping your retirement accounts early. Besides getting extra cash now, taking taxable distributions from your IRA or 401(k) can reduce your future account balance and required minimum distributions, which start at age 70 1/2. Smaller RMDs mean a smaller tax tab.
Also think about tapping your home equity with a reverse mortgage line of credit. Any remaining unused balance in the line of credit will grow at the same rate as the interest rate on the loan.
Tapping cash value in a life insurance policy or taking a loan against your policy, Nolan says, could make up for the Social Security shortfall. Your death benefits would be reduced, however.
Those still several years from retirement should max out retirement account contributions. In 2016, workers age 50 and older can stash up to $24,000 in a 401(k) and up to $6,500 in an IRA. Putting in more money now will give you a larger nest egg to tap if you want to quit working before taking Social Security at age 70.
And remember you'll earn delayed retirement credits for each month you wait to collect past full retirement age. "If something changes, you could turn on the income at age 68 or 69," says Mike Lynch, vice-president of strategic markets for Hartford Funds. Your benefit will still be boosted by the delayed credits you earned up to that point.
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