The file and suspend Social Security strategy received media attention after the 2015 fiscal budget was released by the White House earlier this year. The Obama administration, in their budget narrative “proposes to eliminate aggressive Social Security claiming strategies, which allow upper-income beneficiaries to manipulate the timing of collection of Social Security benefits to maximize delayed retirement benefits.” However, there have been no specifics provided.
So, what is the file and suspend strategy?
Let’s start with the basics before getting to file and suspend. Seniors can increase their annual Social Security benefit through delayed filing. Benefits are based on a formula called the primary insurance amount (PIA). If a senior waits to start collecting benefits at his full retirement age (FRA – currently age 66), he will receive 100% of PIA. On the other hand, if a senior begins taking benefits at the earliest age of 62, he only receives 75% of PIA. In addition, the higher benefit is enhanced by Social Security’s annual cost-of-living adjustment, which is added back for any years of delayed filing. If the senior decides to wait until age 70 to collect benefits, his benefits will increase approximately 8% per year. Delayed filing translates to higher annual income for life, however it can mean fewer lifetime years of benefits depending on longevity. Enter the file and suspend strategy and Social Security planning.
What is file and suspend and how does it work?
The most common use of file and suspend is to generate additional income for the spouse initially and to maximize the lifetime benefits. The spouse with the higher benefits (PIA) files for benefits at full retirement age (currently 66), then immediately files a notice to suspend payment of those benefits (delaying until age 70). For illustration, let’s assume the higher income spouse is the husband. When the husband files for full benefits at 66, this filing permits the wife to file for a spousal benefit equal to half the husband’s benefit.
The couple gets the benefit of an income stream from the spousal benefit while the husband’s PIA benefits continue to increase by the inflation factor until he begins to collect his benefits at age 70. Once the husband begins to collect benefits, the wife collects her regular full benefit. It should be noted that the spouse can only collect her full benefit if she waits until full retirement age to claim her spousal benefit.
For the remainder of their lives, the couple benefits from combined higher individual benefits. If the higher income spouse passes first, the surviving spouse converts to a survivor benefit equal to 100% of the higher deceased spouse’s benefit.
Let’s use an example. Jack and Jane both turn age 66 this year. Jack is eligible for a $2,000 per month benefit, while Jane is eligible for $700 per month. If Jack applies for his benefits, this allows Jane to apply for her spousal benefit on his record. The spousal benefit results in a monthly benefit of $1,000 per month for Jane. Jack immediately suspends his filing and allows his benefits to earn 8% per year. At age 70, Jack begins to claim his benefit ($2,640 per month) and Jane converts to her full benefit ($994 per month).
By filing and suspending, Jack and Jane’s cumulative benefit based on life expectancy of Jack at 83 and Jane at 95 is $997,416. If they had opted to both start collecting at full retirement age of 66 and assuming the same life expectancies, their cumulative benefit would be $840,100 (based on T. Rowe Price’s Social Security Benefits Evaluator Calculator.)
In order to implement this strategy, the couple needs to have an additional retirement income stream and resources to provide for their lifestyle and not be solely dependent on Social Security. The file and suspend strategy needs to be reviewed as part of a senior’s global financial and retirement planning since there are multiple factors that affect the total lifetime benefits, including accommodating those seniors who shall want to work after FRA.
The file and suspend strategy can also be used in other circumstances, such as to provide income to minor children of an older parent, increase an early claimant’s income and act as insurance when claiming delayed benefits.
Although the Obama administration is reviewing ways to limit or eliminate this strategy, any change would require congressional action and most likely not happen in the near future. In the meantime, seniors need to evaluate the best Social Security strategy to approach their circumstances.
Mercadien’s Individual Services team can assist with navigating Social Security strategies and determining how they fit into your overall financial and retirement plan.
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