For most people, navigating all the complexities of Social Security can be confusing. Do you wait until you’re at full retirement age (FRA) to take your distributions? Or do you decide to postpone until age 70 to maximize your benefits?
On the other hand, do you file and suspend to allow you or your spouse to collect a larger benefit at a later time? It’s not a decision to be taken lightly. And it needs to be made as soon as April 29, 2016, when the Bipartisan Budget Act of 2015 will close this so-called Social Security loophole.
Married couples with at least one working spouse who has contributed to Social Security through payroll taxes—or those who were married for at least a decade and now divorced—generally choose to exercise the file and suspend option. The maximum amount the spouse will receive is 50% of the working spouse’s primary benefit amount—the monthly income he or she is eligible to receive at FRA.
Here’s How it Works
With file and suspend, the older spouse claims benefits at the current FRA of 66 and then immediately suspends his or her benefits. Then the younger spouse, who must be above age 62, can claim spousal benefits to defer his or her own benefits until FRA.
But wait…there’s more:
- When the older spouse is 70, he or she can claim Social Security benefits that will have grown to the maximum amount, and the younger spouse can collect the larger of his or her own benefit or spousal benefit.
- The advantage is that the spouse who suspends earns 8% each year as an additional Social Security benefit credit.
- The downside is that if you file for a spousal benefit before your FRA, the Social Security Administration (SSA) can reduce your benefit by up to 30 percent, depending on how early you file a claim.
File and Suspend Example: Jim and Jane Banks
Let’s take a hypothetical situation of spouses Jane and Jim Banks. Jane worked before taking time off to raise their three kids and then re-entered the workforce on a part-time basis afterward. So Jane will receive at age 66 approximately $800 a month in Social Security benefits.
Jim, who has been working longer and has had a record of higher earnings, projects to receive $2,000 a month in Social Security benefits if he suspends and waits until age 70. According to SSA calculations, half of his benefit would be $1,000 a month in spousal distributions.
So if Jane claims a spousal benefit, she will receive $1,000 per month in income, based on Jim’s Social Security contributions. Had she filed based upon her own earning records she would have received only $800 per month.
Is File and Suspend Right for You?
It’s a complex decision and one that—like most financial planning strategies—is dependent upon your own situation and goals. Are both spouses still working, or have other sources of income? Or will they need to depend on receiving Social Security benefits earlier than their FRA?
The new law will only affect you if you file and suspend on or after April 30, 2016. If you’ve chosen to voluntarily suspend before that date, the new law will not affect you. Additionally, if you suspend before April 30, if your spouse or children become entitled to benefits, they will not be impacted by the new rules and will continue to receive their Social Security benefits.
Some people recommend acting right away, while others think it’s wise to take a wait-and-see approach.
At JJ Burns & Company, part of our planning process is to help you understand how to best maximize your Social Security options depending on your situation. Contact us today to see if the file and suspend strategy is right for you.
