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Social Security Closing a Lucrative Loophole

Written by Brian Puckett, CFP®, CPA/PFS, Attorney at Law.

If you're planning for retirement, you should be aware of Congress' recently enacted budget deal. Why? Because it eliminates a popular Social Security claiming strategy known as "file and suspend."

File and suspend is essentially a way for married couples to squeeze the maximum amount of benefit dollars from Social Security over their lifetimes. In some cases, file and suspend is projected to add hundreds of thousands of dollars to a couple's lifetime retirement income.

Before we go any further, it's important to clarify that couples who already have the file-and-suspend strategy in place will not be affected by the new legislation. In fact, there is still a six-month window for couples who meet certain age requirements to use file and suspend before the law's provisions take effect.

In the file-and-suspend strategy, the spouse who is the higher earner claims Social Security at his full retirement age—currently 66 or 67 based on the individual's date of birth. The filer then directs the Social Security Administration to suspend his benefits immediately. The filing triggers the lower earner's eligibility for spousal benefits, which are half of the amount of the higher earner's benefit amount.

Why does the original filer suspend his benefits? Because Social Security rewards those who wait to take their benefits with what are known as delayed retirement credits. For every year after full retirement age that a person delays, their benefits grow by 8%, until age 70. The result is benefit checks that are ultimately much larger than they would have been.

Another advantage of file and suspend is that it boosts the lower-earning spouse's benefit if the principal earner dies first. Specifically, the surviving spouse's benefit amount is bumped up to 100% of the deceased spouse's benefit.

Many in Washington saw the file-and-suspend strategy as a costly and unintended loophole in the system, and with the budget bill that President Obama signed on November 2, they have eliminated it. But couples can still benefit by coordinating their Social Security strategies.

These strategies revolve around the fact that Social Security's system of delayed retirement credits remains in place. In most cases, couples will continue to benefit by having the higher-earning spouse delays filing to earn those delayed credits.

Particularly in today's low-interest-rate environment, earning a guaranteed "interest rate" of 8% (the amount your benefit grows for every years of delay between full retirement age and age 70) can be an extremely good deal.

Bear in mind that your Social Security claiming strategy should be coordinated with your income from other sources. For instance, if you delay taking Social Security, you'll need a reliable source of adequate income to get over the "gap" while you wait to start collecting those benefits.

If you'd like to discuss using your Social Security benefits and other sources of income to create a secure and comfortable retirement, please don't hesitate to reach out to us. And if you think you may be interested in using the file-and-suspend strategy before the window closes on May 1, you should get in touch as soon as possible to allow enough time for planning and implementation.