New Social Security rules will have a significant impact on when couples decide to start claiming their benefits. Financial planners and tax advisors were taken by surprise with the elimination of two popular strategies available for Social Security planning. The methods utilized for the past 15 years that are coming to an end include the “file and suspend” and “restricted” applications. However, there is still an opportunity for eligible couples to be grandfathered under the file-and-suspend rule if they apply by April 29. 

Planning when to start collecting Social Security benefits got a little more complicated -- and is not one size fits all. Historically, the higher wage earner was typically the husband, who was also likely the older of the two married individuals. Today family dynamics have changed. Now the wife may be the higher earner or the older spouse. Combine the uniqueness of a couple’s personal situation with the many exceptions to the general rules surrounding Social Security, we can understand why there are specialists and software designed to navigate the options.

Generally, if a person worked for at least 10 years and paid into Social Security he or she can collect benefits. “Full retirement age” for purposes of collecting Social Security benefits depends on when the worker was born. For those born between 1943-1954, full retirement age is 66. For those born after 1955, the full retirement age gradually increases to 67. Benefits can be collected starting as early as age 62 (which causes a reduction in benefits) or as late as age 70. Delaying collection of Social Security benefits from full retirement age up to age 70 results in “deferred retirement credits,” which equal an 8 percent increase in benefits per year deferred, maxed out at 32 percent.  Married couples can claim the higher of their own benefit or half of their spouse’s benefit, provided the spouse also has a work history. Divorced persons can claim half of their ex-spouse’s benefit provided they were married for at least 10 years and have not remarried. Claiming any benefit before reaching full retirement age, regardless if it is the worker’s own benefit or spousal benefit, will result in a permanently reduced benefit.

Many planning strategies are available for Social Security. One such strategy, file and suspend, was recently modified significantly by Congress. Anyone who reaches full retirement age and completes the file-and-suspend application prior to April 29 will be grandfathered under the old rules. Under the old rules, a worker who submits an application to file and suspend can keep working, their benefit keeps growing, and the spouse collects half of the worker’s benefit. However, under the new rules starting April 30, unless the worker is collecting on their own benefit, the spouse is not able to collect their half of the worker’s benefit (also known as the spousal benefit). Now the sole purpose of the file-and-suspend option is to place a protective-like claim on the benefits. Should a worker file this application at age 66 but keeps working until age 68, they can later decide to retroactively collect all benefits locked in at age 66.

Married couples are wise to plan their application for benefits together. The best claiming strategy for a situation where the younger worker earns more could be to have the older spouse claim early or at full retirement age (not deferring until 70). Doing so may result in greater total benefits collected over a longer period of time, albeit at a lower amount, compared to what they would have received over fewer years at a higher monthly benefit.  

If a wife earns more than her husband, the best strategy may be to delay claiming her benefit and have the husband collect on his own benefit early, assuming he has paid into Social Security for 10 years or more. This is so because women typically have longer life expectancies compared to men. Statistically there is less than a 50 percent chance a husband and wife will both live past age 81 and 80 percent of women survive their husbands. This is referred to as longevity risk.

When there is a big difference in age, it would make sense to have the older spouse collect early or at full retirement age while the younger one continues to work. For example, assume John is 66 and his wife, Sarah, is age 63 as of December 31, 2015. If John’s life expectancy is 80 based on family health history, he would collect benefits for 14 years before passing.  Ignoring net present value and the annual cost of living adjustment, if his monthly benefit were $1,800 at age 66, that equates to $302,400 of benefits collected before passing. When Sarah turns 66, she can claim a spousal benefit of $900 per month and still let her own benefits grow until age 70. Up to John’s death, this equals an additional $54,000 of benefits. She’ll max out her deferred retirement credits and stretch out more benefits longer.  Note, if Sarah is not at least 62 by December 31, 2015, this restricted application method would not be available to her.  Instead, she would have to collect on her own work history if she wanted to also collect a spousal benefit.

When to claim Social Security benefits depends on many factors including age, life expectancies and earning history. There is no perfect scenario because we do not know what the future holds. We can develop strategies given assumptions on household finances, the economy and health history.  However, we cannot predict when life-altering accidents or game changing pivots happen.  As a general rule, it is better to defer collecting Social Security until age 70 to allow the deferred retirement credits to build. However, if a person's health history indicates a lower life expectancy it may not make sense to defer until age 70. Instead, perhaps the person should claim early and collect a reduced benefit for several years. Couples can consult with their financial advisor or make use of online software to calculate different scenarios and decide on a strategy that best suits their situation.

Kate Rooney, CPA, MST, is a principal in the Boston accounting firm Edelstein & Company LLP and works with high-net-worth individuals and their families.