In my last blog posting Social Security missteps, part one, I talked about a couple that made a few mistakes by filing for the husband's Social Security benefits prematurely. Let's look at a more obscure rule that only applies to people born on or before January 1, 1954 that can squeeze even more money from Social Security for those that qualify.
Going back a few years, there used to be a lot of complex Social Security filing strategies. Names like "file-and-suspend" and "restricted application" made for some really complex analysis. Although most of those strategies have been eliminated, the "restricted application" made it through for a reasonable amount of soon-to-be-retirees.
What the restricted application does is allow one spouse to file for the benefits they are entitled to under the other spouse's record. Spousal benefits go back to the days of June and Ward Cleaver where mom stayed home to raise the kids and dad went off to work. Congress understood that June was doing hard work for the benefit of the family, even if she didn't get a paycheck for it. So they allow a spouse to collect 1/2 of their spouse's benefit regardless of earnings history.
In June and Ward's case, Ward still collects his full benefit when he files, but June gets 50% of what he's collecting as well. (As a side note, if Ward dies first, June gets the larger of the two benefits, so she'll lose her spousal benefit but collect Ward's full benefit). But what if June worked as well and had her own substantial benefit? That's where the restricted application comes in. For those grandfathered in (born before 1/1/54), this option is still available. It's not optimal for every situation, but it allows one spouse to collect against the other spouse's benefit while their own continues to grow at 8% until age 70.
In the case of the couple referenced in my previous blog article, the husband was grandfathered in to the restricted application benefit, but since he filed under his own benefit, he lost that option. If, instead, he had waited until his wife had filed for her own benefit, he could have collected half of hers while his own benefit continued to grow until maxing out at 70. This is about as much of a cake-and-eat-it-too situation that exists in retirement income planning these days.
Although the restricted application method can be used only situationally, it is a reminder that nobody should be filing for Social Security benefits without having undergone a thorough analysis of the strategies available to them and how each strategy affects their investment portfolio. Being too casual about filing cost this couple literally hundreds of thousands of dollars in lost benefits over their expected lifetimes. Don't let that be you!