Social Security is one most important parts of retirement. Why does it have to be so complicated? Knowing when to apply for Social Security benefits, and whether you are taking advantage of all available options are two key decisions in the success of your retirement plan.
Which leads to today’s topic – how to figure out all your options for starting Social Security. And more specifically – the Social Security Restricted application, which is can be a great way to increase your household’s monthly income.
The Basics - When You Can Apply for Social Security
The earliest you can start. However, at 62 you permanently reduce the dollar amount you’ll receive (by as much as 30%). And, at this age, if you decide to keep working the government may withhold some (or all) of your benefits! Only in certain cases does it end up being more advantageous to start Social Security at 62.
The latest you can start. Why wait? Your benefit will increase +8% each year you defer past “Full Retirement Age” (see below).
Full Retirement Age (“FRA”)
The sweet spot, where you’re neither penalized nor rewarded. Most folks’ Full Retirement Age is between 66 and 67.
If you’re married you might be eligible to receive a benefit off your spouse’s record. The most you can receive is one-half of their retirement benefit. Generally you need to be over 62 and your spouse must already be collecting their own benefit for you to receive a spousal benefit. Use this decision tree – Are spouses eligible for Social Security benefits? to see if you’re eligible.
Assuming you are eligible for a spousal benefit – how do you figure out how much you’ll receive? First, compare your own benefit to your spouse’s benefit. Your own benefit is what you’d be eligible for based on your own work history. If your benefit is less than your spouses, at most you can get up to one-half of your spouse’s benefit. If your benefit is more then you might have some options depending on what year you were born:
- If you were born before 1/1/1954: you can choose either your own benefit or take 1/2 of your spouse’s benefit (and leave your own untouched). At a later date you can switch over to your own benefit. This is called a restricted application.
- If you were born after 1/1/1954: you have no choice. The Social Security Administration automatically gives you whichever is greater – your own benefit or 1/2 of your spouse’s. You would NOT be eligible to do a restricted application.
Real Life Example
When to apply for Social Security is both a science and an art. 62 is the absolute earliest you can start to collect retirement benefits, but does that mean it’s the best time for you to start? Let’s look at a real life example.
John and Jane Smith were both born in 1953 and are ready to retire. John will receive $2,860/month from Social Security if he starts this year (his FRA). Jane is also at her FRA and can receive $1,800/month based on her own work record.
What are their options for claiming Social Security?
Generally conventional wisdom says there are 2 options.
1. Start today. Together they will collect $4,660/month from Social Security.
2. Both wait until 70. If they both wait until 70 they can increase each of their benefits by 8% per year for a total of 32% more each year. They could end up getting over $6,000 per month combined once they hit 70 (not counting sporadic cost-of-living adjustments).
In the words of college football legend Lee Corso, “Not so fast, my friend!”
What if they don’t like either option? Their goal is to maximize Social Security benefits (which waiting until 70 would do), but they don’t like the idea of having to live off their investment portfolio for four years while they wait.
Is there a way to meet in the middle?
Yes, there is!
It’s called a Restricted Application, and it is their third choice.
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What is a Social Security Restricted Application?
A Social Security restricted application is a way for a married couple to choose which Social Security benefit they want to collect – their own, or 1/2 of their spouses. It allows a married couple to simultaneously delay one of their benefits to 70 to get the annual 8% bonuses, and at the same time still receive Social Security income TODAY.
In our example John and Jane were born in 1953. This means they meet the age cutoff (born before 1954) so they each have the option to pick between their own benefit or one-half of the other’s.
* A Restricted Application is NOT the same as “File & Suspend”, which you’re no longer allowed to do (cancelled in 2015).
How do you file a Restricted Application?
Back to our example. Since John has the larger benefit they want to try to delay his for as long as possible.
The way a restricted application would work is that Jane applies for her own retirement benefit first. This is very important. The lower-earning spouse must apply for their own benefit, even if the Social Security person tells them they are eligible to get more if his or her spouse files first. In this example Jane will get her full $1,800/month, just like option #1.
Next, John will apply. In general you want to wait for the first spouse’s application to be processed just so there is no confusion. John will check the box on his application that he is applying for spousal benefits only. In other words, he is only applying for one-half of Jane’s benefit (“restricting the scope” of his application…hence the name). He is set to get $900, which is one-half of Jane’s benefit. His $2,860 personal benefit is left untouched.
John and Jane will get a combined $2,700 per month from Social Security now. They do nothing for the next 4 years.
Now fast forward to John’s 70th birthday. At this point he can “activate” his own Social Security benefit, which – given 4 years of 8% bonuses – has grown to approx. $3,775/month (not counting cost-of-living adjustments)! To activate his own benefit, all he has to do is re-file an application with Social Security indicating he is ready to switch to his own record. A Social Security restricted application is as easy as that!
Here’s a visual summary of how a Restricted Application compares to filing at FRA and filing at 70:
* John starts collecting 1/2 of Jane’s benefit today; then at age 70, he switches over to his own benefit which has grown 8% per year the past four years.
**In today’s dollars, assuming an average life expectancy of 92 (John) and 94 (Jane).
***The age at which John and Jane collect more from Social Security over their lifetimes by delaying benefits, versus starting immediately (at FRA).
It’s true waiting until 70 gets the largest dollar amount. But look closely: Over a 30-year period they’d only receive $30,000 more than if they’d done a Restricted Application. That’s $1,000 extra each year, or only $83 more per month. Consider that if they decide to wait until 70 they likely will need to pull funds from their retirement accounts to make ends meet. Is that trade off worth an extra $83 each month? They’d also have to live to their mid-80s for their patience to pay off (called the break-even point)
What’s more, the restricted application results in $200,000 more income over their lifetimes compared to the default scenario of both them starting their own benefit at their Full Retirement Age. That is because they get the benefit of receiving money today, and also delaying the higher benefit for 4 years to get the 8% bonus. It is really the best of both worlds.
Summary - Who Does a Restricted Application Work Best For?
The Restricted Application strategy can be a game changer for some couples, but it is not for everyone. Generally speaking, this is the profile of someone who is able to do a Social Security restricted application:
1. Married couple
2. At least one spouse was born before 1/1/1954
3. Ideally the spouse with the larger benefit is the one who was born before 1954
4. Both are eligible for their own retirement benefit based on their own work record
5. Neither spouse has started collecting their benefit yet
Beyond just trying to rake in the highest dollar amount, there are a few other things to keep in mind when deciding when to apply for Social Security.
Namely, you should also consider reliable income sources you have at your disposal (pensions, part-time employment, rental properties, etc.) and your family health history (i.e. longevity.. longer life expectancy = more time to enjoy a larger benefit and vice-versa).
In general, if you have other sources of reliable income that can comfortably cover all your bills, then you should be able to delay Social Security longer.
Longevity wise, if you are in bad health then you may want to consider starting Social Security sooner rather than later (because you might not live long enough to make up for the time you delayed benefits). On the other hand, if you have a family history of longevity then there is a good chance you’d live long enough to make up for delaying benefits. In this case you would consider delaying benefits to 70 in order to give yourself the maximum amount of income for the rest of your life.
Social Security is rife with more pitfalls and long-lasting consequences than initially meet the eye. Knowing when to apply for Social Security is a huge part of your overall retirement plan. If you meet the criteria discussed above, you and your spouse should consider the Social Security restricted application to maximize your monthly income in retirement.
Call us today to talk about your strategy in more detail.
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