Social Security strategies that don’t work – and one that does
The end is coming! The sky is falling! Social Security is doomed!
Now that I’ve gotten your attention, let me just say that the above paragraph is a bunch of bunk.
The U.S. Social Security trust fund as it stands now could be out of money by the 2030s, but the optimist in me knows that means we have 20 years to correct the problem. That’s plenty of time to noodle on things and make some needed adjustments.
If you’re over 50, you have little to worry about as far as Social Security goes. It will likely look much the same now as when you retire.
That’s not to say that things won’t change.
Back in June, I had Social Security expert and author Emily Guy Birken on the Retirement Answer Man podcast to talk about some big changes to Social Security and to discuss strategies that could still work for you and me.
She had some great suggestions for people coping with big changes to the program. At the end of April, the government shut down a couple big Social Security loopholes: the file and suspend strategy and the restricted application strategy.
Nowadays, these strategies that could have netted a couple as much as $60,000 more over their lifetimes no longer work. In this blog post, I’ll walk you through these closed loopholes and one other strategy proposed by one of my podcast listeners and tell you why they don’t work.
Then I’ll tell you a Social Security strategy that you can count on for your retirement.
File and suspend strategy for Social Security is dead
The file and suspend strategy was a loophole in the system that allowed some couples to maximize combined benefits.
Using the strategy, as soon as one spouse hit the full retirement age of 66, that person could file for Social Security but immediately suspend their benefits. Since you don’t withdraw the maximum amount of Social Security until age 70, those suspended benefits continued to increase by roughly 8 percent per year for another 4 years.
The simple act of filing, however, triggered spousal benefits to kick in and continue despite the suspension.
It was a great loophole while it lasted, but legislators unexpectedly revised the rules on an aggressive 6-month timeline to be completely nixed by April 30 of 2016. The change forced Emily to rewrite about half of her book on Social Security shortly after sending it to her editor. Yowser!
Restricted applications for Social Security are restricted
Restricted applications were a companion to the file and suspend strategy. At full retirement age, 66, a spouse used to be able to file a restricted application to claim spousal benefits while deferring their own benefits to age 70.
At 70, the spouse could then swap in their own higher benefits and stop receiving spousal benefits.
Of course, the option for restricted applications is now also restricted as of April 30, 2016. These rule changes both hurt Emily’s mother, who turned 66 in September last year. If she’d been relying on loopholes like these, the update would have been seriously bad news.
Retroactive lump sums don’t happen anymore
The last rule that got legislated out of existence is retroactive lump sum payments. This allowed a bit of a safety net for people holding out for larger payments until age 70.
If their health declined or they had other unforeseen financial circumstances in the years between 66 and 70, they could take a lump sum back payment without the 8 percent annual growth that would have occurred if they held out until age 70.
This loophole also phased out on – you guessed it – April 30, 2016.
If you need to opt in to Social Security on an emergency basis between 66 and 70, you will now start receiving benefits with no lump sum. But the icing on the deflated 70th-birthday cake is that your Social Security payments will start higher because of whatever deferral you manage to accrue.
Another spousal benefit Social Security strategy to avoid
This last strategy is something a listener recently suggested that will only end up tethering you to lower benefit payments.
Neal is the same age as his wife Sally but her Social Security benefits are worth less than half of his. His thought was to start taking her benefits as early as possible at age 62 and then swap up to the spousal benefit at age 66 when Neal filed for his full benefit. In theory, that would allow her to start getting benefits early and still get half of her husband’s Social Security payment when he started taking benefits.
Sounds good, right?
Not so much.
The spousal benefit for Sally is split into two different benefits: her own and a second supplemental benefit that covers the gap to what her husband’s benefit allows on the spousal benefit option.
No matter when Sally starts taking her benefits, the spousal supplemental benefit is worth what it would be if Sally retired at full retirement age of 66.
For example let’s say, Neil’s benefit is $3,000 a month at age 66 and Sally was entitled to $1,000 on her own. Her spousal benefit of $1,500 (half of Neal’s) would actually be two benefits; her $1,000 benefit and a $500 supplemental benefit. If Sally filed for a reduced benefit at age 62 her benefit would be $750 per month. Once she reached full retirement age the spousal supplement would kick in for a total benefit of $1,250.
That means $1,250 per month starting sooner versus $1,500 per month if she waits. If she lives to age 90, the opportunity cost for testing this strategy is $72,000. If you factor in normal adjustments to inflation it could cost them over $110,000!
That would buy a cruise or two…
Don’t rely on loopholes – they change
Social Security strategies are bound to come and go as the rules change. When you’re dealing with government, the rules change whenever they decide they want to change them.
That’s why I recommend betting on yourself.
Social Security is a huge benefit and makes up a good chunk of earnings for many people on fixed incomes. It may be the only payout you can rely on until you die since legislators aren’t likely to change much for those who have already started receiving benefits.
The Social Security strategy I recommend: Bet on yourself!
Wait until full retirement age to start taking your benefits. It’s a bet on your own longevity.
Between ages 62 and 70, you’re guaranteed a return of about 8 percent per year. I don’t know of any investments that promise that reliably. (If you do, I want in!)
Waiting to retire until full retirement age could guarantee an 8% ROI per year.
Besides, Emily pointed out the “tax torpedo” that’s likely to explode on you if you take benefits early.
In short, about 40 percent of retirees who take Social Security benefits early will be taxed on their benefits.
How much? Between 50 and 85 percent, depending on how much you’re taking out of your other retirement income sources like IRAs and 401(k)s.
If you’re tight and may not be able to make it to full retirement age before taking benefits, one strategy I’ve seen work well is working part-time to fill the gap until your higher Social Security benefit kicks in.
Working part-time to fill the gap can help you lock in a higher Social Security benefit for you and possibly your spouse. It has other great benefits too:
- Gives you structure to your day while still having the time freedom most retirees cherish.
- Helps you build a new social network.Not all Social Security strategies work. Especially after some popular strategies bit the dust in 2016.
- Offers a chance to use your talents doing something you enjoy.
As Emily told me, the worst thing that could happen isn’t to die young. Far worse is a world where you survive until 110 without any money to pay for your longevity.
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Social Security will change
There are no big changes to Social Security akin to the file and suspend closure on the near horizon, but that doesn’t mean it won’t change before you retire. Keep your ear to the ground by subscribing to my podcast and reading my blog. I’ll keep you up-to-date on anything coming that could affect your golden years.
Question of the week:
Do you see Social Security as an insurance policy or as your retirement plan? Answer in the comments below. I always respond to thoughtful comments!