Today I am writing a little about filing a restricted application for Social Security retirement benefits. I turn 62 later this year but have no intention of applying for an early retirement benefit. I have not yet had any personal interactions with a representative of the Social Security Administration. I have heard from others that when a retiree seeks to apply for benefits, they are told what to do and how to do it but generally that is the extent of it.
The strategy of filing a “restricted application” for benefits is not generally known or considered. A recent report from the AARP quantifies the general lack of knowledge by baby boomers of how Social Security benefits are even determined. Only 3% of the participants in the survey scored 75 or greater on a basic Social Security knowledge test. That is unfortunate and sad because a lot of lifetime income can be at stake.
So what is a “restricted application” for Social Security retirement benefits?
The answer is actually simple. The questions of if and when you should use a restricted application are more difficult to answer.
A “restricted application” is used when a “retiree” wants to file for Social Security retirement benefits but not his or her own benefit. Instead, the retiree “restricts” the application to a spousal benefit.
So who would file a restricted application and why?
Let’s assume that a “retiree” is married and has determined that it makes financial sense to delay receiving Social Security benefits until past full retirement age, e.g., age 70. This delayed claiming strategy makes good sense because of the significant increase in benefit amount that can be realized. (For example, if you would be entitled to a $15,000 annual benefit at age 62, that benefit increases to $26,400 if you wait until age 70.)
However, if the retiree’s spouse has reached age 62 and is receiving benefits, the retiree can claim and receive a spousal benefit while continuing to accrue credits for delaying the retiree’s own benefits.
Here is an example of how this would work:
Assume that a wife started collecting benefits years at age 62. The husband, who is now 66, is still working and wants to delay receiving his own Social Security benefit until he stops working at age 70. Further assume that the wife would have been entitled to a Social Security benefit at full retirement age of $1,750/month. Therefore, the husband is entitled to receive a spousal benefit of $875/month for every month that the husband does not claim his own benefit. If he waits until age 70 as planned, he would receive $42,000 in spousal benefits from his wife’s earnings record. More important, for each year of receiving the spousal benefit, the husband is receiving credits that will earn him an 8% annual increase in his own benefit. Of course, he switches to his own Social Security benefit at age 70.
To be clear: Filing a restricted application would give this couple $42,000 in additional income over a four year period!
The restricted application strategy is usually best if the lower earning spouse has a Social Security retirement benefit that is at least half as large as the higher earning spouse’s benefit. If that is not the case, the better strategy for spouses may be “claim and suspend.”
Keep in mind that a restricted application for Social Security benefits can be filed only if your spouse is already receiving a retirement benefit.
Also keep in mind that you may not be told any of this at the Social Security office unless you ask the right person. This is when it pays to apply for benefits in person, not online.
There is much to consider when deciding on Social Security benefit strategies, don’t you agree?