The Art of Asset Location
Written by Andrew Hunt
Written by Jason Hiley
(When discussing Social Security, genders are interchangeable in all instances. For the sake of simplicity, the husband will be referred to as the higher wage earner.)
Waiting to claim Social Security benefits can result in undeniable advantages – the increase in the total lifetime benefits received can increase by as much as six digits. Although delaying Social Security increases your cash flow the most significantly, other strategies are available to you to provide monthly income benefits while you delay claiming your own benefits.
Basics of Restricted Application
Anytime you apply for Social Security benefits, the Social Security Administration assumes (unless you indicate otherwise) you are applying for all of the benefits available to you: your own worker’s benefit, spousal benefit, and/or widow’s benefit. Your total monthly income benefit is then determined based on the highest benefit (or combination thereof) for which you are eligible.
Once you have reached full retirement age (FRA- 66 for those born between 1943-1954), the Social Security Administration permits you to limit, or restrict, the scope of your application to exclude specific benefits available to you. This option is known as a “restricted application” and is only available to those at or past FRA (exceptions may apply for widow/widowers). The restriction must be made unequivocally at the time of application.
Restricted Application Strategies
Filing a restricted application allows you to claim one of the Social Security benefits (personal/spousal/widow) for which you are eligible while allowing the other(s) to grow and potentially earn delayed retirement credits (DRC). If you file a restricted application, you are essentially filing for one benefit with the plan to switch to a higher benefit at a later date.
The first scenario in which filing a restricted application may be advantageous is if the lower earning spouse has a worker’s benefit that is greater than, or could potentially grow greater than (through DRC), her spousal benefit. At FRA, she could restrict her Social Security application to exclude her own worker’s benefit, only claiming her spousal benefit. Her worker’s benefit would then earn DRC through the age of 70.
Consider the case of Jim and Linda Wilson. Linda is 66 (FRA) and is eligible for $1,000 on her own record. Her husband Jim’s benefit at FRA is $2,000 making Linda’s spousal benefit also equal to $1,000.
|Monthly Benefit Amount|
|Linda’sAge||Claim Own at 66||File Restricted at 66/Claim Own at 70|
By restricting her application at 66 to claim only her spousal benefit then changing to her own benefit at 70, Linda has increased her monthly benefit by $320 (almost $4,000/year) while not foregoing any benefits from age 66-70.
A second instance in which filing a restricted application can result in a greater lifetime Social Security benefit is if the higher earning spouse is of FRA but wants to earn DRC by delaying his own Social Security claim. If his wife is 62 or older and has already applied for Social Security, he may benefit from filing a restricted application to receive only the spousal benefit on his wife’s record. He will receive a monthly spousal benefit until age 70, when he will switch to his own Social Security benefit that has grown by 32% through DRC.
Bob and Kathy Smith may benefit from this second “file and switch” strategy. Bob has a benefit of $2,000 at FRA. He wants to wait until 70 to draw his Social Security to earn the maximum amount of DRC. Kathy has already claimed her full Social Security benefit of $1,600.
|Monthly Benefit Amount|
|Bob’s Age||Claim Own at 70||File Restricted at 66/Claim Own at 70||Additional Benefit|
By restricting his application to a spousal benefit only at age 66 then changing to his own benefit at 70, Bob increases his total lifetime benefit by nearly $39,000 without losing out on the opportunity to earn DRC.
Consult a Professional
Unfortunately, most people make Social Security decisions without consulting a professional. You may be surprised to learn that the Social Security office is not allowed to give advice on strategies that would help maximize your potential benefit. An expert in Social Security planning can take into account variables such as your current age, life expectancy, and financial assets in order to help you identify an election planning strategy best suited to maximize your lifetime Social Security benefit.
Don’t miss out on tens if not hundreds of thousands of dollars in lifetime Social Security benefits by making an uninformed decision. Call or email us today to arrange a time to discuss your unique situation.
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