Final days of file-and-suspend claiming strategy

Before Congress changed the rules regarding Social Security claiming strategies in late 2015, many financial advisers enthusiastically promoted ways to maximize lifetime retirement income benefits for married couples and eligible divorced spouses. But the Bipartisan Budget Act of 2015 put an end to two lucrative claiming strategies, which legislators dubbed “unintended loopholes.”

The first of two creative claiming strategies to bite the dust was known as “file and suspend.” It allowed individuals at full retirement age or later to file for their Social Security benefits and then immediately suspend them, allowing their retirement benefits to grow by 8% per year for every year they postponed claiming beyond full retirement age up to age 70.

In the meantime, the act of filing for Social Security would trigger benefits for eligible family members, such as a spouse, minor dependent child or permanently disabled adult child.

The strategy also allowed anyone who filed and suspended their benefits to request a payout of all suspended benefits in a lump sum in lieu of receiving delayed retirement credits.

Because this strategy is no longer an option for new retirees, some advisers have forgotten the valuable benefits available to people who exercised the strategy before the April 29, 2016, deadline.

“A soon-to-be 70-year-old prospect informed me that an attorney and her financial planner had her file and suspend when she reached full retirement age at 66,” a financial adviser wrote to me in an email recently. “They said that at age 70, she will have the option to receive her full retirement age benefits plus 32% in delayed retirement credits or elect to receive her age 66 benefit and then get a lump sum payment of the money not received over the last four years.”

“I can’t find anything that validates that information,” he wrote. “Am I missing something?”

Lucky lady! Her forward-thinking financial planner and attorney gave her good advice four years ago. Individuals who filed and suspended by the end of April 2016 deadline are grandfathered under the old rules. They can request a lump sum payout of all suspended benefits in lieu of receiving delayed retirement credits for the same period. If she does nothing, her benefits — including four years’ worth of delayed retirement credits — will automatically begin the month she turns 70. Social Security benefits are paid the month after they are due, so April benefits would be paid in May.

The last group of people to benefit from the file-and-suspend claiming strategy turn 70 in April. They will automatically receive their maximum retirement benefit when they turn 70 or they could request a lump sum payout of suspended benefits. After that, this claiming strategy will be one for the history books.

Individuals are still allowed to suspend their Social Security benefits at full retirement age or later in order to earn delayed retirement credits, but the rules are different.

For those who suspend their benefits after April 29, 2016, anyone collecting on their record, such as a spouse, would also lose their benefits. And if they suspend their benefits, they cannot collect benefits on anyone else’s record, such as their spouse, during the suspension.

However, there is one major exception. If you are a divorced spouse, you can continue receiving a divorced spousal benefit even if your ex-spouse voluntarily suspends his or her retirement benefits.

So who may want to file and suspend Social Security benefits under the new rules?

Assume a husband and primary breadwinner claimed his Social Security benefits at 62, permanently reducing his benefit by 25% because he claimed four years before his full retirement age. Perhaps he didn’t realize that by claiming reduced benefits early, his wife would also get a smaller survivor benefit if he died first. Survivor benefits are worth up to 100% of what a deceased worker was collecting or entitled to collect at time of death. A smaller retirement benefit translates into a smaller survivor benefit.

Once that husband reaches full retirement age, he may want to voluntarily suspend his benefits. Although his Social Security payments will stop, his benefits will earn delayed retirement credits worth 8% per year up until age 70.

The math works like this. At 62, he began collecting 75% of his full retirement age benefit for four years. At 66, he suspends his benefits and they begin to grow by 8% per year for a total increase of 32%. When you multiply his reduced benefit of 75% by 1.32, his benefits at age 70 would be worth 99% of his full retirement age benefit amount. If he dies first, that’s how much his widow could collect in survivor benefits, assuming she was at least full retirement age at the time.