For affluent baby boomers hurtling toward retirement, maximizing Social Security has been a hot financial topic—perhaps even the hot financial topic—in recent years. As pensions have ebbed away in the private sector, many retirees and pre-retirees have woken up to the value of the guaranteed lifetime income stream offered by Social Security. The financial crisis burnished the value of a guaranteed income source whose value increases the longer you wait to claim.

“Advanced” claiming strategies have gained traction as a means of wringing the largest possible benefit out of the program; married couples with differing ages and earnings histories have a gamut of perfectly legal opportunities to bump up their benefits.

But one of the key advanced claiming strategies—the so-called file-and-suspend maneuver—is on the chopping block, thanks to the latest Congressional budget deal.

File-and-Suspend Basics
File-and-suspend is a way for couples, usually those with one higher-earning spouse and one lower-earning spouse, to boost their benefits from the program. Under the maneuver, the higher-earning spouse files for his or her benefit at full retirement age but then suspends the filing. That initial filing, however, allows the lower-earning spouse to file for spousal benefits—equal to one half of the benefit of the higher-earning spouse—when he or she is eligible to do so. The higher-earning spouse can then file to start payments at a later date, up to age 70, thereby earning delayed retirement credits and plumping up the eventual benefit.

File-and-suspend bumps up income during the higher-earning spouse’s lifetime, but it also boosts the eventual income of the lower-earning spouse, assuming the higher-earning partner dies first. That is because the surviving spouse’s benefit amount switches to 100% of the deceased spouse’s benefit amount, assuming the latter benefit is higher than the surviving spouse’s own benefit on his or her work record.

Details, Details
File-and-suspend has been on a watchlist for a while; in 2014, the White House’s budget plan called it an aggressive move whose benefits accrue primarily to affluent households. But research shows that 46% of file-and-suspend benefit flows to the top 40% of households as measured by wealth, points out that the maneuver was not exclusively in use among high-income earners.

Initially, there was some confusion about whether couples already using file-and-suspend would be “grandfathered in” under the old rules; an earlier draft of the budget legislation that kills file-and-suspend suggested they would not be. Retirees who are already using file-and-suspend—or request it within six months of the law’s passage—can continue to employ the maneuver. Importantly, spouses who will be at least 62 by the end of 2015 can also file for spousal benefits under file-and-suspend at their full retirement ages, assuming their spouses have already filed for benefits or requested to file and suspend their benefits within six months of the law’s passage.

It is also worth noting that while the new law shuts the door on file-and-suspend for couples who can not pull off the maneuver before the deadline, couples can still take advantage of other strategies for maximizing their Social Security benefits.

It still usually makes sense for the higher-earning partner to delay filing past full retirement age, if possible. Not only does that boost the couple’s income if the primary earner lives beyond his or her average life expectancy, it also boosts the surviving spouse’s survivor’s benefit. Of course, delayed filing can mean that a couple taps their nest egg earlier in their retirement years to make up for foregone Social Security benefits, but retirees would be hard-pressed to earn a return on their investment assets that competes with the 8% increase in retirement benefits they earn for each year of delaying past their full retirement ages.

Lower-earning spouses should consider filing for the 50% spousal benefit ahead of their own full retirement ages, if that benefit is greater than their own Primary Insurance Amount (PIA).


©Morningstar 2015. All Rights Reserved. Used with permission.