With all the media attention centered on the demise of file and suspend, you might have gotten the idea that it no longer matters what you do regarding Social Security claiming decisions. Not true! File and suspend was utilized by a surprisingly narrow range of Social Security claimants, sometimes inappropriately and to a couple’s detriment. However, it was a very “cool” technique that often made me look like a genius, so I regret that it no longer has a place in the claiming toolkit. That being said, the particular claiming strategy that you and your spouse choose can still make a substantial difference in the benefit dollars you will collect.
Example 1: Tom and Nancy missed out on file and suspend. Nancy could be eligible to file a restricted application for spousal benefits under the new rules, but Tom missed the deadline by a little less than 6 months, and he will not be eligible. I worked with Tom and Nancy in May 2016, and here are some of the more important aspects of their situation:
Nancy was born in April 1952; she expects to earn about $24,000 this year before she retires in December. Her Primary Insurance Amount (PIA) is $1,525, while Tom’s is estimated at $2,722. Tom was born in May 1954; he hopes to work until just past age 70, earning the maximum amount of Social Security covered earnings each year until then. For planning purposes, they asked me to assume life expectancies of 90 for Tom and 95 for Nancy.
They identified their benefit priorities in this order:
- Total lifetime benefits over their assumed life expectancies
- Combined monthly benefits during their 70s and 80s
- Survivor benefits
- Early benefits – total received before Tom turns 70
I was able to create and illustrate a total of six representative claiming strategies. Notice the differences in the dollar amounts the various strategies are projected to generate.
Total Lifetime Benefits. This represents the aggregate amount of combined benefit dollars Tom and Nancy would expect to receive over their lifetimes if Tom lives until 90 and Nancy lives until 95. The most productive strategy generates about $170,000 more in total lifetime benefits than the least productive approach.
Combined Monthly Benefits at Older Ages. This reflects the combined monthly payments Tom and Nancy will receive between the time Tom turns 70 and his assumed death at age 90. The benefits produced by the various strategies range from a high of $5,744 to a low of $4,352 – a difference of nearly $1,400 per month.
Survivor Benefits. When Tom passes away, Nancy will switch from her benefits to survivor benefits equal to what Tom was receiving at the time of his death. Several strategies will deliver over $3,700 per month to Nancy as the survivor – a $900 improvement over the least productive approaches.
Early Benefits. Some couples have a “take the money and run” approach to claiming; but focusing on early benefits generally means sacrificing significant amounts of total lifetime benefits, combined monthly benefits at older ages, and survivor benefits. The strategy that generates about $195,000 more in early benefits than the least productive approach ranks last with respect to all three of their top priorities.
Example 2: In January 2016 I worked with Anne and Jerry. They were both born in 1958 – much too late to become eligible for either file and suspend or the opportunity to file a restricted application for spousal benefits on each other’s record.
Anne’s PIA is $2,776 while Jerry’s is $2,322. Jerry has some health issues that prompted them to request a shorter life expectancy assumption (80) for him for planning purposes. Jerry has already retired, and Anne expects to earn over the Social Security taxable wage base each year until she retires at the end of 2019.
Anne and Jerry’s benefit priorities were exactly the same as in Example 1, except that in their case total lifetime benefits were to be determined under assumed life expectancies of 80 (Jerry) and 91 (Anne). Once again I developed six claiming strategies for their consideration:
Total Lifetime Benefits. The most productive generates about $191,000 more than the least productive.
Combined Monthly Benefits at Older Ages range from a high of $5,210 to a low of $3,695 – a difference of about $1,500 per month.
Survivor Benefits. When Jerry passes away, Anne will continue receiving her retirement benefits as the survivor. The most productive strategy generates over $3,500 per month for Anne as the survivor – a $1,400 advantage over the least productive. Survivor benefits could be particularly important here, since Anne projects to survive Jerry by just over 11 years (133 months).
Early Benefits. Here again the strategy that generates the highest amount of early benefits (about $190,000 more than the lowest) does the worst job of supporting their top three priorities.
The point of these examples is not to point out what these couples should do about claiming their benefits, but rather to illustrate the wide variety in results that could result from their claiming decisions. What they should do is figure out which approaches fit best with their priorities and risk tolerances in the context of their overall financial situations.
Both of these examples demonstrate that it is hard to make sound, well-informed decisions about Social Security without understanding the full range of options that are available to you.
WHAT IF ONE SPOUSE HAS ALREADY FILED AND SUSPENDED?
Quite a few people managed to file and suspend in the final days before the April 29 deadline; in fact, I advised some folks to do exactly that when there was not enough time for me to complete an analysis before the deadline. My reasoning: they could file and suspend only until April 29, but if it turned out not to be to their advantage to do so they could easily withdraw their application in the weeks and months that followed.
Example 3: Sarah is two years older than Ed, who turned 66 in April 2016. She began collecting benefits at age 62 based on a PIA of about $1,500. When Ed approached me in early April, he was ready to file and suspend but wanted to know if he was “missing something.” Ed’s PIA is around $2,660.
When I reviewed Sarah and Ed’s information, it became clear that file and suspend was entirely inappropriate for this couple. If Ed had filed and suspended, Sarah would not be able to claim spousal benefits – in other words, filing and suspending would not have accomplished anything for them. However it would have prevented Ed from collecting $750 per month for the next 48 months – a total of $36,000 more than if he had filed and suspended. Needless to say, Ed opted for the alternative approach.
There are a lot of Ed’s out there who filed and suspended within the past 12 months without fully understanding the advantages of using that technique as compared with other approaches. Are you one of them? Could you have “missed something” too? If so, how many thousands of dollars might you be leaving on the table?