Getting Your Financial Ducks In A Row

Note: with the passage of the Bipartisan Budget Bill of 2015 into law, File & Suspend and Restricted Application have been effectively eliminated for anyone born in 1954 or later. If born before 1954 there are some options still available, but these are limited as well. Please see the article The Death of File & Suspend and Restricted Application for more details.

Many couples that have done some planning with regard to filing for Social Security retirement benefits have figured out how to coordinate between the higher wage earner’s benefit and the lower wage earner’s benefit.  Often it makes the most sense to file for the lower wage earner’s benefit early, at or sometime near age 62, while delaying the higher wage earner’s benefit out to as late as age 70.

This method allows for a maximization of those two benefits.  If you’re really astute, you probably picked up on the concept of file and suspend, as well.  File and Suspend allows for the lower wage earner to increase his or her benefits by adding the Spousal Benefit, while the higher wage earner continues to delay his or her benefit, adding the delay credits.

Another little-known method that can be employed in specific circumstances is called the Restricted Application for Spousal Benefits.  This method provides one spouse or the other with the option of collecting a Spousal Benefit, while at the same time delaying his or her own retirement benefit.

First Example

Let’s work through an example to help understand the concept.

Joe and Jane are both age 62, and they have expected retirement benefits at age 66 (also known as a Primary Insurance Amount, or PIA) of $2,000 and $1,000, respectively.  The strategy that they intend to employ is for Jane to file now, at age 62, and then Joe will delay his benefit to age 70.  By doing so, Jane’s benefit will be reduced to $750 per month; after he reaches age 70, Joe will be eligible for an increased benefit of $2,640.

The normal usage of File and Suspend won’t work in this case, since Jane’s PIA of $1,000 is equal to 50% of Joe’s PIA of $2,000.  (If you need more information on File and Suspend, see this article.)  This is where the Restricted Application can apply.

As we know from prior articles on the subject, the Spousal Benefit is available to one spouse when the other spouse has filed for his or her own benefit.  In addition, we know that filing for a Spousal Benefit prior to Full Retirement Age (FRA) invokes deemed filing, which would require that all eligible benefits are filed for at the same time.  After FRA, deemed filing does not apply.

Back to our example, when Joe reaches Full Retirement Age (FRA, age 66) he can be eligible for a Spousal Benefit based upon Jane’s record.  In order to do this and still delay his benefits, he would file a Restricted Application for Spousal Benefits Only with the SSA.  This type of application restricts the filing solely to Spousal Benefits.  Since Joe meets the qualifications for receiving a Spousal Benefit and he’s at or older than FRA, he will be eligible to receive 50% of Jane’s PIA as a Spousal Benefit, while still delaying his own benefit.  Deemed filing doesn’t apply since he’s older than FRA.

In doing this, Joe will receive $6,000 per year for four years, or $24,000 (Cost-of-Living Adjustments have been left out of our example for the sake of clarity).  If Joe didn’t know about this special rule, that’s money that he would never have received at all, money left on the table.

This method will also work if the couple are farther apart in age, and if their benefits are farther apart.

Second Example

Here’s another example:

Mike is 66 and Michelle is 62.  Michelle has a PIA or expected age 66 benefit of $1,800, and Mike has just filed for his own benefit in the amount of $800 per month.  In order for the couple to maximize Michelle’s benefit by delaying her filing to age 70, she can file the restricted application at age 66, FRA, and receive 50% of Mike’s benefit while continuing to receive the delay credits out to age 70.  When she files for her own benefit age age 70, Mike can then file for a Spousal Benefit, which would increase his own benefit by $100 for the rest of his life.  This is because 50% of Michelle’s PIA of $1,800 is $900.  Subtracting Mike’s PIA from that amount leaves $100 for Mike’s Spousal Benefit increase.

Third Example

Bob is 58 and his wife Roberta is 62.  Roberta has a PIA of $2,000, and Bob’s projected PIA is $700.  Roberta intends to delay her benefit to the maximum amount, age 70.  Bob will file for his own benefit at age 62, and as such his benefit will be reduced to $525.  At that time Roberta will be 66, and so she could file and suspend, which would provide Bob with an opportunity to increase his benefit by adding the Spousal Benefit.  If they did that, the Spousal Benefit increase would be $210 ( after reduction since he’s under FRA), bringing his total benefit to $735.  Roberta is not receiving a benefit at all at this point, she’ll receive her first benefit at age 70.

However, if at age 66 (FRA) Roberta were instead to file a restricted application for spousal benefits (instead of filing and suspending to allow Bob to file for the Spousal Benefit), the Spousal Benefit that she’d receive would be $350.  She can do this since she’s at age 66 and Bob has filed for his own benefit.  The Spousal Benefit of $350 is $140 more than the Spousal Benefit that Bob would receive under the File and Suspend strategy.  She would receive this $350 benefit until she reaches age 70 and files for her own benefit.  Then Bob could file for the Spousal Benefit at that point, increasing his overall benefit by $300, to a total benefit of $825.

If the couple didn’t use the second method, they’d be leaving $6,720 on the table, and unnecessarily leaving Bob with a lower benefit for life.