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Money March 2016

Financial Fortitude

Saying Goodbye to Social Security File and Suspend Provisions

By Karen Telleen-Lawton

Your wealth manager was correct that strategizing with your Social Security claim has been a financial boon to many retirees, and you are right that some of these strategies (or loopholes, depending on your persuasion) are ending.

Dear Karen: Last year a financial advisor printed out a retirement strategy for us that included those fancy Social Security strategies – filing and suspending, collecting spousal, switching benefits, and so forth. Now that we’re a year closer to retiring, I’ve seen in the paper that some of this is changing. I didn’t really get it then, and I’m more confused now. What’s the deal? My husband was born in 1951 and I was born in 1952. – Confused almost-retiree

Dear Confused: Your wealth manager was correct that strategizing with your Social Security claim has been a financial boon to many retirees, and you are right that some of these strategies (or loopholes, depending on your persuasion) are ending. As the song goes, you don’t know what you got ‘til it’s gone. On the plus side, as we age there are not too many occasions to be too young for something!

The sweet deal that is closing is the ability of an earner to file for benefits but suspend receiving them (“file and suspend”) while a spouse files for a “restricted benefit,” collecting the spousal benefit instead of their own. This garners some Social Security income while allowing both spouses’ benefits to grow 8% per year to the maximum.

In the most straightforward scenario, the older/higher earner reaches Full Retirement Age (FRA), walks into the Social Security office to file for benefits, and then asks them to be suspended. That way, her benefit continues to grow at 8% per year (plus any cost of living increase) until age 70.

When the lower earner reaches FRA, he or she files for the spousal benefit (which is equal to half their spouse’s income), allowing their own benefit to keep growing 8% per year. The couple collects this spousal benefit only, until the higher earner reaches age 70 at which time the higher earner begins collecting their maxed-out benefit. The lower earner keeps collecting the spousal benefit until they turn 70, at which time they switch to their own maxed-out benefit if it is higher.

This file and suspend strategy is being phased out for seniors who have not reached their 66 birthday by April 30, 2016. You two youngsters don’t make that deadline. However, as the rules are currently being interpreted (it’s still in flux), you fall into a bit of an in-between space. If you were 62 or older by the end of 2015 (yes!), you may still be able restrict your benefit to just the spousal when you turn 66, allowing your own benefit to grow until age 70.

In practice, every situation is different depending on the relative ages and life expectancies as well as the need for cash flow. Here is how it might work for your ages, assuming your goal is maximizing your expected lifetime Social Security benefits:

  1. When the older/higher earning spouse reaches Full Retirement Age: do nothing.
  2. When the younger/lower earning spouse reaches Full Retirement Age: if born by January 1, 1954, they may be able to restrict their application to just the spousal benefit. Otherwise, when they apply for Social Security, they will be assigned the highest possible benefit, whether their own or spousal. If they want the benefit to grow until age 70, they don’t apply for benefits at the FRA.
  3. When the older/higher earner turns 70: apply for and begin collecting benefit for the first time. Younger spouse continues to collect spousal benefit.
  4. When the younger/lower earner reaches age 70: if this retiree was able to collect spousal only at FRA, they now request to switch to own benefit (if higher).

Naturally, the particulars matter. For instance, if one spouse’s benefit is much lower than the other, they may choose to collect the spousal benefit and never bother with their own. Each beneficiary can only collect one benefit at a time, whether it’s worker, spousal, dependent, survivor, or disabled. These lifetime benefits are substantial, so that even with some strategies removed, it’s a good idea to run the numbers with an advisor. Recheck if your planning wasn’t done recently.

It does sound confusing, but a couple of guidelines can help you collect your highest benefit. The first is this: with very few exceptions, if you collect benefits before your FRA, whatever benefit you collect will be permanently reduced. Secondly, if your life expectancy is at least 81 and you have adequate cash flow, you’ll almost always be better off waiting to collect until you reach age 70.

Good luck to both of you!

 

Karen Telleen-Lawton serves seniors and pre-seniors as the Principal of Decisive Path Fee-Only Financial Advisory in Santa Barbara, California (http://www.DecisivePath.com). You can reach her with your financial planning questions at  This email address is being protected from spambots. You need JavaScript enabled to view it. .

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