The elimination of a valuable Social Security strategy that married couples use to get more benefits comes at the end of this month. That has some older Americans scrambling to get in before it’s gone, while others are adjusting their retirement planning to live without it.
The federal budget deal signed by President Obama in December put in motion plans to get rid of the “file-and-suspend” strategy in Social Security that allows a retiree’s spouse to collect benefits when the retiree is not.
That could mean tens of thousands of dollars less in benefits over the course of the couple’s retirement. Divorced spouses will still be able to receive benefits even if their ex-spouse has suspended benefits.
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“This is definitely a big blow to those who are planning to retire before 70,” says Evan Beach, a financial planner with Campbell Wealth Management in Alexandria, Virginia. “The extra income streams help take stress off of their portfolio in the early years of retirement. Now if they want to wait until 70 to claim, all of the income will have to come from pensions or investments.”
How it works
A retiree can file and immediately suspend their Social Security benefits, while the retiree’s spouse can start receiving their spousal benefit right away. The advantage is that by suspending benefits and waiting longer to collect Social Security, the retiree will eventually get a bigger monthly benefit.
That’s because if you file for Social Security benefits at 70, you get the maximum benefit, a monthly paycheck from the government that is up to 76 percent more than what you would have received if you had filed at 62. The file-and-suspend strategy allows a married couple to tap some Social Security benefits early on, while locking in the maximum benefit later on.
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“It was an especially helpful option for a married couple with benefits that were close to equal since it allowed both to increase their benefits to the maximum while still collecting on one earnings record,” says Victoria Fillet-Konrad, founder of Blueprint Financial Planning in Hoboken, New Jersey. She noted some couples could receive $30,000 to $50,000 less in benefits over their lifetime because of the elimination of file-and-suspend.
The alternatives
Financial planners are working overtime for their clients who are 66 or older to take action before the April 30 deadline. Those who are too young for file-and-suspend, but turned 62 last year, can file a restricted application, which allows the filing retiree to get the lesser, spousal benefit. At 70, the person will switch back and get their own, larger benefit. Just like with file-and-suspend, waiting to get the full benefit means a larger payout.
“This often makes sense if a couple has similar benefit amounts,” says Beach. But this strategy is also being eliminated by the new legislation for those under 62.
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Otherwise, there are other claiming strategies to consider, says Elisa Murphy, a financial planner with Level Financial Advisors in Amherst, New York. For instance, the higher wage-earner delays their benefits until 70, while the lower wage-earner begins benefits at full retirement age. This allows the bigger benefit to grow while the smaller benefit provides cash flow for the couple, Murphy says.
Americans will just have to plan ahead even more.
“Our clients that were not grandfathered in are still young enough that we can effectively plan for the reduction in total Social Security retirement benefits,” says Patrick Wallace, wealth manager at Higher Strata Wealth Management in Hurst, Texas. “In some cases the reduction was close to six figures, but when it is spread out over 30 years, it is a manageable problem.”
