A common loophole used by millions to increase their Social Security earnings will disappear May 1. Whether you can still take advantage of it in the next two months depends on two things you can’t control – your age and the age of your spouse. There is one thing you can control – moving fast enough to take action by April 29.
The tactic is known as “File and Suspend” and its use helped to spawn an industry for all those offers you receive in the mail, on television and over the internet for advice on Social Security strategy.
In brief, the strategy allows a married couple to collect the spousal benefits of one party while neither collects their standard benefits. And while this is happening, the “suspended” or delayed standard benefits continue to grow at about 8 percent a year. Sweet, right? Congress and the President decided it was too sweet when they eliminated it last year in the comically named Bipartisan Budget Act of 2015. That budget passed last November, with the elimination of the strategy occurring April 29.
The strategy was an unintended consequence of lawmakers in the past. They were trying to limit the negative effects of those continuing to work after collecting Social Security benefits. (You can read a detailed discussion here on the back story of the loophole’s accidental creation and its elimination on purpose.)
By eliminating this strategy, the Social Security Administration estimates it will save $9.5 billion per year in outlays.
Here is how the File and Suspend strategy works. For sake of the explanation, let’s say the husband has the higher Social Security benefit. He files for his benefit at full retirement age (66) and then “suspends” taking it, continuing to accrue delayed retirement credits at 8 percent annually. That sets the stage for the wife to file what is known as a “restricted” application for the spousal benefit (equal to about half of his larger, regular benefit). The restricted application effectively delays the filing for her own benefit, allowing it also to continue earning delayed retirement credits at 8 percent. The net result in this case: the couple receives half of the higher benefit while their standard individual benefits grow at 8 percent annually until they decide to start taking them. In the most lucrative scenario, they would both initiate the standard benefits at age 70 as mandated by Social Security.
There are two age rules to meet for this to work. First, you must be at least 66 (Full Retirement Age) to file and suspend, so one or both spouses must meet that requirement. If both are 66, it is most lucrative for the one due the highest benefit to File and Suspend. The other must have turned at least 62 by the end of 2015 to be eligible to file for “Restricted” benefits. That option goes away for anyone younger.
Those who have already executed the strategy will not be affected.
The good news for widows is that nothing changes. A widow can still file a “Restricted” application for survivor benefits while delaying her own benefit to allow its growth in value.
Divorcees who did not work much before the divorce could be big losers in the change. The restricted benefit from a spouse could allow them to receive a spousal benefit while they work more and/or allow their own benefit to grow. This strategy is still only open to those who turned 62 or older by the end of 2015.
One final perk taken away deals with retroactive lump sum payments. Under the old rules, those who did a “File and Suspend” could change their mind at a later date should their circumstances change. For example, if a medical emergency arose a year after the suspension, the filer could elect to start benefits at the level he or she would have been eligible for at the time of the filing a year earlier. Further, the filer could request a lump sum of payments retroactive all the way back to the filing date. Under the new rules, one who has suspended benefits can lift the suspension at any time, but will not receive payments retroactive to the original filing. Instead, the benefits will start upon the date of the suspension being lifted, and the filer will receive appropriate increases in the benefits based on established growth rates.
Find a more thorough review of the changes in U.S. News & World Report here. The Social Security Administration’s explanation of File and Suspend is here, and its explanation of the Restricted application is here.
Deciding to take advantage of the strategy, or deciding when to take Social Security in general, should be part of your overall financial plan. The change in Social Security laws makes the plan even more important. Those between ages 62 and 70 should make sure their filing strategies will still work under the new rules.
The difference in total lifetime benefits for various strategies can run into the hundreds of thousands of dollars.
For those young enough to be affected by the change (those 61 or younger as 12/31/15), the “free” spousal benefits are gone. Your decisions are simpler, but delaying benefits is still the most lucrative unless special circumstances, such as poor health, make it obvious to take benefits earlier.
For people who have never been married, delaying is still usually advantageous.
If you have used a Social Security optimization service and it was before the law changed last November, you should run a fresh one. Have your advisor do it, or there are tools available online. Confirm that whatever software you use has adjusted for the change.
If you plan needs a change, I would suggest handling it well before the deadline. Many actions can be handled online with the Social Security Administration. If you end up requiring personal attention, get with your Social Security office well before the deadline of April 29 to avoid getting caught in any last-minute rush. As the deadline nears, lines at the office and wait times with help lines could be long.
Securities offered through LPL Financial, Member FINRA/SIPC. Financial Planning offered through Lifestyle Planning Solutions, a registered investment advisor. Investment advice offered through Stratos Wealth Partners, a registered investment advisor. Botsford Financial Group, Lifestyle Planning Solutions and Stratos Wealth Partners are separate entities from LPL Financial.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
For a list of states in which I am registered to do business, please visit www.botsfordfinancial.com.