A Social Security claiming strategy known as file and suspend, which has been around since the year 2000, comes to an end this week.
The impact of the changes will affect advisors with clients in the midst of a multistep Social Security claiming strategy.
First, though, a recap.
In “file and suspend,” one member of a couple files and claims benefits — allowing his or her husband or wife to begin collecting spousal benefits — only to then suspend his or her own benefit to collect on a higher benefit payment in the future.
Under the new rules effective April 30, “when an individual suspends his or her own benefits, not only will all benefits payable to that individual be suspended, but all benefits payable on his or her earnings record payable to other individuals will also be suspended,” according to a recent blog post published by Fidelity Investments.
Claimants receiving benefits now under this strategy are grandfathered and will continue to receive them. After Friday, April 29, no one will be able to elect this option as the new rules limiting suspended benefits go into effect on April 30.
Because most Social Security recipients elect not to wait until the full retirement age of 66 to collect their benefits, file-and-suspend only affects a fraction of recipients — usually higher earning filers who can afford to wait to collect on Social Security.
Eliminating file-and-suspend could add up to as much as $50,000 in lost income or the equivalent of four years of spousal benefits, said Wade Pfau, an expert on retirement planning with The College of Financial Services in Bryn Mawr, Pa., in an interview last year.
Properly executed, a file-and-suspect strategy can boost a recipient’s Social Security income by more than 30 percent.
Here’s how it works, according to some back-of-the-envelope math by Kevin Hansen, director of business development — retirement solutions with Principal Financial Group.
At age 66, which Social Security considers full retirement age, Sam applies for his full retirement age benefit of $2,071.
His wife, Anne, also 66, applies for spousal benefits of $1,035.50 per month, or half of her husband’s benefit. As soon as Sam’s benefit application goes through, he immediately suspends the payment of that benefit.
Suspension lets Sam accrue delayed retirement credits of as much as 8 percent per year, which boosts his benefit to an estimated $2,733 at age 70.
But under the new rule, Sam’s benefits payable to other individuals will now also be suspended.
InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].
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