A RetireMentors column of mine from July 2014 regarding a Social Security loophole’s huge windfall opportunity, discussed a relatively unknown application of the file-and-suspend strategy whereby single individuals could, in effect, insure their retirement benefits.
The file-and-suspend strategy was effectively eliminated by the Bipartisan Budget Act of 2015 that was signed by President Obama on Nov. 2. With the passage of this legislation, applications to use the strategy must be filed with Social Security Administration by April 29, 2016.
The file-and-suspend strategy has generally been promoted as one that benefits married couples. For those of you who may not be familiar with it, the strategy allows one spouse who has reached full retirement age, which is currently 66, to defer his/her benefit start date while triggering a spousal benefit.
Generally speaking, the higher-earning spouse files and suspends, earning 8% annual increases in benefits until claiming up to age 70. This can result in a 32% increase in benefits plus cost-of-living adjustments, or COLAs, if the benefit start date is deferred to age 70. In the interim, the other individual receives a spousal benefit of up to 50% of the filing and suspending spouse’s full retirement age benefit, depending upon his or her age.
Hidden benefit for single individuals
Although it wasn’t promoted as such, and hadn’t received widespread attention until the Bipartisan Budget Act of 2015, the file-and-suspend strategy isn’t limited to married couples. Single individuals who reach full retirement age and file an application by April 29, 2016 can also benefit from use of the strategy.
How can single individuals use this strategy to their advantage? To answer this question, let’s look at an example. Let’s assume that Lisa, who is healthy and has reached her full retirement age of 66, decides that she would like to defer her Social Security start date until age 70 to receive a monthly benefit that will be at least 32% greater than what she would receive at age 66. Lisa has sufficient other income and assets to meet her expense needs during her four-year deferral period. She doesn’t need to file any forms with Social Security Administration until age 70 to accomplish her goal.
Let’s further assume that when she turns 69, Lisa experiences a significant change in her health and isn’t sure how much longer she will live. She can immediately file an application for Social Security benefits and will begin receiving a monthly full retirement age benefit increased by 24% (8% x 3 years) plus COLAs for the rest of her life.
Had Lisa submitted an application when she reached 66 to file and suspend her benefits, she would have been entitled to request payment of a retroactive lump sum of monthly benefits that she would have received had she started collecting benefits when she reached full retirement age when her longevity was in doubt. Furthermore, Lisa could have done this at any time between age 66 and 70.
Going forward, Lisa would receive her full retirement age benefit plus COLAs. In other words, she would forfeit the potential annual 8% increase in benefits totaling 32% that she would have received had she not filed for a retroactive lump sum payment of benefits and continued to wait until age 70 to claim her benefits.
Like several provisions in the hastily enacted Bipartisan Budget Act of 2015 that eliminate the payment of Social Security benefits that have sound economic basis, this change is unquestionably unfair. Why should someone who has paid into the system for at least 10 years (you need to have Social Security earnings for at least 40 quarters to be eligible for benefits), and for as long as 50 or more years, receive no benefits whatsoever or just a handful of months of benefits as would be the case in Lisa’s situation?
Not to mention the fact that had Lisa filed and suspended her benefits at age 66 and requested payment of a retroactive lump sum of monthly benefits at age 69, her payment would only include benefits that she would have received had she filed an application to begin her benefits at 66. Her lump sum wouldn’t include the annual increases of 8% per year that she “earned” for the three years from age 66 to 69 as a result of her choice to defer her start date.