Due to the passage of the Bipartisan Budget Bill of 2015, there have been changes to social security legislation and claiming strategies. Consequently, time is running out as we approach the deadlines for the File-and-Suspend claiming strategy. Social security rules can be complex, but it is important to understand them, with the help of an advisor, in order to optimize benefits.
File and Suspend – Current
The File-and-Suspend deadline is April 29, 2016. For those of you who have reached full retirement age or will reach it by May 1, 2016, you may still File-and-Suspend your benefits. Benefits cannot be suspended past age 70. The deadline is important whether you are an individual who is filing and suspending for a potential lump-sum reinstatement in the future, a couple claiming spousal benefits or a family claiming dependent or disabled child benefits.
Under the current rules, the fact that benefits have been filed for means a spouse is eligible for spousal benefits (spousal benefits cannot be claimed until the primary worker also files for benefits). The immediate suspension of benefits after filing allows the original filer to earn delayed retirement credit increases of 8% per year.
Under the current rules as they apply to individuals, an individual who plans to delay benefits until full retirement age anyway, could file and suspend. This ensures that if s/he had a change of mind later, it is possible to retroactively claim a reinstatement of benefits in the form of a lump-sum back to the original file-and-suspend date.
Below is an illustrative example of the current File-and-Suspend claiming strategy from Michael Kitces, CFP®, ChFC, CLU (https://www.kitces.com):
John and Mary are both age 66, and have been married for 40 years, in a household where John was the primary breadwinner and Mary never worked outside the household. John is eligible for a retirement benefit of $2,000/month at his full retirement age, and Mary at her full retirement age will have no retirement benefit of her own, but will be eligible for a spousal benefit of $1,000/month, equal to 50% of John’s full benefit.
John wants to delay his benefits until age 70, increasing his benefit by 4 years x 8%/year of delayed retirement credits to $2,640/year (plus subsequent cost-of-living adjustments). Doing so not only boosts his own benefit, but increases the size of John’s survivor benefit that would be payable to Mary if John dies first.
However, waiting until John turns 70 means that Mary won’t receive any of her $1,000/month spousal benefits until then either, since Mary cannot get spousal benefits until John actually files for his own. And since there are no delayed retirement credits for spousal benefits, the extra 4 years of waiting just means Mary permanently loses those 4 years of $1,000/month benefits with no benefit in return!
To resolve this issue, John would File-and-Suspend upon becoming eligible at his full retirement age of 66. By doing so, Mary becomes eligible to claim her own $1,000/month spousal benefit (which she can receive in full, since she too is age 66), accumulating 4 years’ worth of spousal benefits she otherwise wouldn’t have received. (If Mary had been younger, she could have also claimed, but her spousal benefits would be reduced for starting early.) And John still gets the 8%/year delayed retirement credit increases for delaying his own benefits until age 70.[fusion_builder_container hundred_percent=”yes” overflow=”visible”][fusion_builder_row][fusion_builder_column type=”1_1″ background_position=”left top” background_color=”” border_size=”” border_color=”” border_style=”solid” spacing=”yes” background_image=”” background_repeat=”no-repeat” padding=”” margin_top=”0px” margin_bottom=”0px” class=”” id=”” animation_type=”” animation_speed=”0.3″ animation_direction=”left” hide_on_mobile=”no” center_content=”no” min_height=”none”][1]
File and Suspend – Amended
Under the new rules, effective April 30, 2016 (and applicable to anyone who reaches their full retirement age on or after May 2, 2016), when the original filer suspends benefits, s/he suspends benefits for all. Therefore, a spouse cannot claim spousal benefits until the original filer begins benefits. A spousal benefit is paid to a worker’s spouse if that spouse would not qualify for benefits based on his or her own work history or if 100% of the spouse’s benefit is less than 50% of the primary worker’s benefit.
Under the new rules, there is no option to reinstate back to a prior month. Instead, suspended benefits can only be resumed in the month subsequent to when the request to resume is made.
There are additional considerations for parents with dependent or disabled children. Please consult your advisor regarding the applicability of the Social Security changes to your personal situation. For more information about social security changes or to learn more about Callan Capital, please do not hesitate to contact us at (858) 551.3800 or marketing@callancapital.com.
Disclaimer: Callan Capital does not provide individual tax or legal advice. Clients should review planned financial transactions and wealth transfer strategies with their own tax and legal advisors. For more information, please refer to our most recent Form ADV Part 2A which may be found at www.adviserinfo.sec.gov.
[1] https://www.kitces.com/blog/navigating-the-effective-date-deadlines-for-the-new-file-and-suspend-and-restricted-application-rules/[/fusion_builder_column][/fusion_builder_row][/fusion_builder_container]