Social Security “File & Suspend” Strategy Ends in April 2016

The passage of the newest Federal Budget is causing some rapid responses by those who might be considering a strategy for Social Security planning called “file and suspend.” It was designed by the Social Security Administration after the Great Depression of 2008. Many people who had begun to take their Social security benefits found they could not make ends meet after all their investments went south. So the Feds allowed seniors to suspend taking their Social Security benefits and go back to work, hoping they could contribute additionally to the system and take their higher benefits later on. Good idea, but those in the know found another interesting use (abuse?) of the strategy.

Married couples with a significant disparity between spouses’ Social Security benefits could choose to allow the spouse with the higher earnings history to file for his or her benefit and promptly suspend it. That spouse would continue to work and contribute to the system assuming he or she would get a larger benefit sometime in the future.

So what’s so smart about that?

Well under the current law, it allowed the lesser-earning spouse to claim a benefit under the higher-earning spouse, usually creating a larger monthly spousal benefit than if the spouse tried to claim on his or her own earnings. For example, John, a 66-year-old engineer could at this point file for his full Social Security benefit. But he is not interested in taking the money now; he’s happily employed and sees himself being like that until at least age 70. As he continues to work and earn money at the top of his scale, he is also contributing to his Social Security account and will receive a significantly higher benefit at age 70 (an increase of 8% per year from age 65 on). So now, Mary, John’s wife, can apply for and collect a benefit from John’s earnings history which is much higher than hers. And they can benefit from that option allowing Mary to collect a nice monthly amount over at least 5 years. Even at $1000 per month, that is an additional income stream of $60,000 over five years! Nice deal if you can get it.

But not any more.

As of April of 2016, they government will stop allowing that option unless the higher-earning spouse is already claiming his or her benefits. Then it reverts to the current system where a spouse can claim a benefit under his or her own earnings history or his or her spouse’s, whichever is higher. But the higher-earning spouse must REALLY be retired.

All good things must come to an end…

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