In the past, when I talked with clients about the File and Suspend strategy for collecting Social Security, there was always a point where they looked a bit incredulous, like it was too good to be true. Well, now Congress has decided that the strategy is, in fact, too good to last for too much longer.
Let’s look at a hypothetical example of how this strategy might play out to understand what we are losing: Joe and Susan decide to use File and Suspend when they reach their full retirement age (FRA) of 66 and are entitled to 100% of their Social Security benefits. Susan was the higher earning spouse and she has a monthly benefit of $1,500 at her FRA. She files for Social Security at age 66, and then immediately suspends her benefits. Next, rather than claiming his own benefit at age 66, Joe can choose instead to claim a “spousal benefit” under Susan’s account, receiving half of what her benefit would have been: $750/month (or $9000/year).
Here’s how the strategy delivers returns: While Joe collects the spousal benefit from Susan’s suspended account, both of their individual accounts continue to grow by approximately 8% a year. And all this growth is without market risk!
Four years later, when Susan reaches age 70 and by law her account stops growing at 8% a year, she re-starts her benefits. And, you guessed it, Joe stops taking the spousal benefit. Now age 70, he files for his own benefits, which have been growing during the time he collected the spousal benefit.
By adding on four additional years of growth, Susan and Joe are each able to collect 132% of the amount that they would have collected at age 66. In addition, the couple received $36,000 from spousal benefits while their benefits continued to grow.
Unfortunately, the Bipartisan Budget Act of 2015 has this year eliminated File and Suspend for most folks. You’ll note my use of the word “most.” If you were born after January 1, 1954, you cannot use the File and Suspend strategy. But there is a little wiggle room and some grandfathering. If you were born before May 1, 1950, you have until April 29, 2016 to apply for the File and Suspend strategy. And if you have already filed and suspended and are receiving benefits you will not be impacted by the suspension of File and Suspend.
The next few months are an important transition period where clients of retirement age will have one last chance to reap the benefits of File and Suspend. So, please come in and talk with us. We have a software program that can aid in our analysis and help us to develop a Social Security strategy that makes sense for you. And if you are wondering, the Social Security Administration has pledged to honor all applications for File and Suspend made by the deadline, even if it takes them longer to process the paperwork.
Finally, File and Suspend has not totally disappeared from the Social Security lexicon. You can still file for Social Security benefits and then suspend your benefits. That is, perhaps you file at age 62 and immediately decide that you have made a mistake and want to wait to collect benefits so that they continue to grow. There’s fine print there, too; these strategies are complicated and rules of thumb just don’t apply. Bottom line –When to collect Social Security is an important decision for individuals and couples and we are happy and well-qualified to help you make the best decision you can!
