File and Suspend Strategy for Social Security is Going Away 4/30/2016

One of our greatest retirement insurance benefits we have is the annuity provided by Social Security. A new law will greatly limit some individuals’ ability to maximize their benefits under a strategy called “file and suspend”.

When we think of insurance we often forget the social insurance contracts that we have with our government. Certainly Medicare, Medicaid and VA coverage are obvious benefits. Social Security retirement income is often overlooked as a valuable retirement insurance vehicle. It provides anywhere form 1/3 to 100% of individuals’ retirement income, depending on the personal situation.

With many employers going to a 401k or other defined contribution retirement plan, employees are less able to confidently predict the retirement income. There is some comfort in knowing that Social Security is still a pension, promising to pay a fixed income amount every month.

One strategy that can serve some people quite well is called “File & Suspend”. This works best when the older spouse has higher income and therefor higher retirement benefits from Social Security. It works like this:

The older higher income earner files when eligible for full benefits (age 66 or so) but then immediately suspends taking the benefits. This will allow their personal retirement income to earn delayed retirement credits at about 8% .

For example: I have attained Full Retirement Age (66) and my benefits are $2707. My spouse is age 62 and can only collect $500 monthly on his own social security retirement income. “File and suspend” could work for us. I could file and suspend my benefits until age 70. My $2707 would grow to about $3600 monthly, while my spouse could take the spousal benefits off my account of about $2000 monthly now at hisbage 62.

Remember the younger spouse did not have high earnings. But since the high earning spouse simply filed, this act allows a younger spouse to now file and obtain the higher spousal benefits rather than the lower amount based on their own income. The lower earning spouse must be at least age 62.

Teachers or other public employees who also have social security earnings may want to consider taking full social security benefits if they continue to work past their Social Security full retirement age.

Most people are unaware that teachers and those with a public pension will lose most of their social security benefits once they start taking their public pension (STRS, PERS and the like). The theory is that this keeps a public employee from “double dipping”. It’s called the WEP (Windfall Elimination Provision).

The key provision in this is actually taking the public pension. So, those who will continue to work past Full Retirement Age may want to file for benefits while continuing to work. The income will be taxable, but it will not be subject to the WEP until the retiree actually start taking the PERS or STRS retirement. Plus the fact that full retirement age is attained means the income will not be reduced for any earned other income. There is no earnings test at this point.

(I have been told that legislators who earn their pension after only a few years of service are not subject to the WEP but I have been unable to confirm this.)

It’s an important part of your planning to know your Social Security benefits. Go to https://www.ssa.gov/myaccount/ to set up access to your account. In addition you can do the following in your account:

  • Keep track of your earnings and verify them every year;
  • Get an estimate of your future benefits if you are still working;
  • Get a letter with proof of your benefits if you currently receive them; and
  • Manage your benefits:
    • Change your address;
    • Start or change your direct deposit;
    • Get a replacement Medicare card; and
    • Get a replacement SSA-1099 or SSA-1042S for tax season

Social security is an important insurance contract and well worth your time to manage it. In my experience, most people spend more time planning their two week vacation that they do planning their retirement!

Margaret R. Beck

Margaret Beck CLU, ChFC, CEBS started her insurance practice in Redding in 1978. She is the founder of Affiliated Benefit Services where businesses and individuals are assisted in choosing proper products, compliance with complex benefit laws and claims issues once coverage is placed.