Monday, October 21, 2013

Social Security Spousal Benefits Part 3: Restrict the Scope Strategy

As we continue our series on Social Security, we'll next look at a strategy referred to as "Restrict the Scope."  It is recommended you first read our posts on Social Security, Spousal Benefits and File and Suspend before continuing.

As with File and Suspend, Restrict the Scope refers to a filing strategy used by married couples to maximize their Social Security benefits.  It is often mentioned when both spouses have similar earnings records, but has many more practical applications.  In fact, Restrict the Scope is generally much more utilized than File and Suspend.

To review, briefly, everyone is entitled to a Social Security benefit based on their own earnings record.  As a spouse, you are also entitled to benefits based on your partner's earnings record equal to a maximum of 50% of their Primary Insurance Amount (PIA).  Simply put, you receive the greater of your benefit or the Spousal Benefit, but not both.  Your spouse must file for Social Security themselves in order for you to receive Spousal Benefits.

If you file for Social Security benefits before your Full Retirement Age (FRA), then you are deemed to be filing for any and all benefits, including Spousal Benefits. And these benefits would then be reduced for every month prior to your Full Retirement Age you file.

Let’s return to the case of Woodrow and Edith Wilson, but with a minor change. Edith will still be age 66 (her FRA), but now with a PIA of $2000. Woodrow is age 66 (his FRA) with a PIA of $2400.

If Edith wants to file for Social Security benefits today, she would get 100% of her PIA as she is Full Retirement Age (FRA), so $2000. She is not eligible for any Spousal Benefit as her PIA exceeds 50% of Woodrow’s PIA.

Woodrow still intends to wait and collect at age 70 in order to maximize his benefit due to the Delayed Retirement Credits. His benefit, at 70, would be $3168. (In our cases we are not including any calculations for Cost of Living Adjustments or COLAs.)

However, as Woodrow is of Full Retirement Age, he now has the option to elect which benefits he is filing for. He can file a “restricted scope” application indicating he only wants to collect any Spousal Benefit for which he is entitled. (Social Security is gender neutral – husbands can collect on wives as well as vice versa.)

As the husband of Edith, he is eligible for a Spousal Benefit equal to a maximum of half of her PIA, so $1000. As he is FRA, there is no reduction to this amount, which he can now collect while his own benefit continues to increase due to the DRCs. At age 70, he then files to collect his own benefit – stopping the Spousal Benefit – and now gets the maximum benefit amount of $3168.

The obvious advantage is the Wilsons collected an additional $1000 per month for 4 years and at the same time allowed Woodrow’s benefit to reach its maximum. But just as importantly, it also provides additional protection to the surviving spouse when either of them passes away.

With so much at stake financially, it is critical to consider all of the implications and strategies before filing for Social Security benefits.  We at Kemp Harvest Financial Group are committed to helping our clients make informed decisions regarding Social Security, taking into account the various assumptions, factors and options available.  If you have any questions or if we can assist you in any way, please feel free to contact us directly.


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