Financial Journeys

GOODBYE, FILE AND SUSPEND. NOW WHAT?

New rules eliminated this Social Security claiming strategy, but there are other options

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Growing up, many of us viewed Social Security as a continuation of our work income, something we’d automatically receive upon retirement. Then reality struck, and we learned there’s more to claiming and receiving Social Security benefits. So much more. And the strategies to maximize this important source of retirement income can be complicated.

One strategy, known as “file and suspend,” became popular among married couples. The higher earning spouse would file for Social Security benefits once he or she reached full retirement age (FRA) – and immediately suspend them. The other spouse (and eligible dependents) could then collect benefits on the higher earnings record. Meanwhile the original applicant earned delayed credits on their individual benefit until age 70. But that’s no longer on the table. Why?

Last November, Congress amended Social Security rules to remove aggressive claiming strategies that have been around since 2000. The new regulations went into effect as part of the 2015 Bipartisan Budget Act, effectively eliminating the popular file and suspend strategy. Now, a spouse or dependent child can only claim spousal benefits after the original applicant begins to receive his or her benefits. If the original applicant suspends benefits, all related benefits under the same earning record stop. The new rules also eliminated something called restricted spousal benefits, which previously allowed someone to “just” file for spousal benefits, while allowing their own benefit to grow. Now, new applicants can’t restrict their applications to just spousal benefits; you’re required to claim all eligible benefits upon filing. You’ll receive whichever offers you the highest payout. One exception: those who were 62 or older by the end of 2015 are grandfathered in and are still eligible to file a restricted application.

Let’s take a look at the remaining strategies available for the rest of us.

FILING OPTIONS

Depending on your situation, it may make sense to use one or a combination of these strategies. Just be sure to consult a knowledgeable professional before making any decisions.

Delay retirement benefits. For those in good health, it may make sense to delay taking Social Security. Your Primary Insurance Amount (PIA) will increase 8% every year you don’t claim Social Security after your full retirement age up to age 70.

Delay spousal benefits until FRA. Spousal benefits don’t grow after that point, but waiting until FRA can help you get the maximum amount.

Stop-Start-Stop. If you claimed benefits at 62 but have since changed your mind, you can voluntarily suspend them when you reach full retirement age. Then you could receive up to an 8% per year increase (not including COLA, which could make the dollar amount even higher).

Divorced/survival spousal benefits. Divorcees and widow(er)s have several strategies available to you based upon the earnings record of your (ex)spouse. There are nuances to the law though, so it’s important to check with your advisor for details.

PLAN, PLAN, PLAN

Regardless of the new rules, or any others that come along, when and how to claim Social Security will always be a strategic and important decision. And expertise can help you decide what strategy works best for you and your family. Whatever you decide together with your professional advisors, your goal should be to seek the largest benefit for the longest period of time.

Whether it’s your marital status, the amount you earned during working years, other income sources or even your health, there are many factors to consider. It’s important to weigh your options and find ways to get the most from Social Security.ss_stats

COLA WITH BENEFITS

Social Security is an inflation-adjusted stream of payments for life. One professor at The American College of Financial Services described Social Security benefits as a life annuity with cost of living adjustments (COLA). In this sense, Social Security really is “longevity insurance,” and for many of us, these benefits represent a substantial part of our retirement income.

Deploying claiming strategies to maximize benefits can make a significant difference in people’s lives. Smart claiming strategies can add about 9% to a couple’s or individual’s retirement income, but mistakes can be costly and irreversible. For example, claiming benefits too early could cost tens of thousands in the long run. It’s best to work closely with a financial professional to make the most of your benefits.

Sources: Fidelity.com; raymondjames.com; Webinar by professor Allen McLellan