With the File and Suspend strategy officially gone, the rules of the road have changed.
This was a strategy that allowed one spouse to file and suspend benefits so that his/her spouse could file for a spousal benefit, and the primary filer would be able to continue benefiting from Delayed Retirement Credits until they resumed them at a later date. The end result, would be that their benefit would be up to 32% higher.
Obviously, with the passing of the April 29th, 2016 deadline, this strategy is no longer possible. In this article, I’ll cover 5 Social Security gotchas that can help you going forward. Social Security planning is still critically important because of the various Social Security strategies that still exist to help you maximize your benefits.
1. Don’t Take Two Benefits at Once; You’ll Lose One of the Two
Because of something called “the Deemed Filing Rule”, Social Security will not pay you two benefits at once. It will only pay you the larger of the two benefits. For example, if you’re a married couple and file before your Full Retirement Age (66 for most people), you’ll be forced to take the higher of the two benefits available; either on your own record or as a spouse.
As a spouse, you’re entitled to up to 50% of your spouse’s Full Retirement Age amount; so if you file at let’s say 65 (1 year before your Full Retirement Age), Social Security will compare the benefit amounts on your record vs. 50% of your spouse’s and will pay you the higher of the two. Why is this a problem? Well, it can drastically reduce your options and strategies available in the future causing you to miss out on Delayed Retirement Credits.
For instance, if you had waited one more year, then claimed ONLY a spousal benefit and waited to collect on your own record at a later date for example, your overall benefits would be higher. We just recently helped a married couple to claim only a spousal benefit for the wife at age 66, and then claim her own benefit at 70. As a result, we were able to identify over $63k in extra spousal benefits, while also giving her the ability to benefit from a retirement benefit that will be 32% larger when she claims at 70.
2. You Can Get a Do-over and Suspend Benefits
If you’ve made the mistake mentioned above, you can undo some of the damage if you’re younger than age 70 by suspending your benefits. By suspending your benefits, you will begin to accrue Delayed Retirement Credits again at the rate of 8% per year, until 70. This is often a wise move as it is difficult to obtain a similar return on your money in today’s current market and interest rate environment. Clients often suspend their benefits and then bridge the gap by tapping into an IRA or 401K for instance.
3. A Lump Sum Sounds Attractive, But Don’t Take The Bait So Easily
When you file for Social Security, if you are over your Full Retirement Age, the Social Security Administration has the ability to pay you retroactive benefits for up to six months. This may sound very attractive at first glance. Who wouldn’t want to receive let’s say $12,000 as a lump sum based on a monthly benefit of $2,000 per month? You have to be careful here, however, because it greatly depends on your specific circumstances as to whether this will help you or hurt you.
In most cases, over the long-term, it will hurt you. The reason is that when you take this lump sum benefit going back six months, you also wipe out the Delayed Retirement Credits that have accumulated for these six months.
Those credits will be equivalent to 4% of your Full Retirement Age amount and so, by taking the lump sum for $12,000 you would permanently lose the extra 4% that would have lasted for the rest of your lifetime. A good trade off? It depends on your financial situation, so it’s important to crunch the numbers first. Honestly, in most cases, it doesn’t work to your advantage and the Social Security Administration often suggests taking this lump sum. So be careful.
4. Don’t Have Enough Social Security Credits? You Need 40
So what happens if you’ve contributed to Social Security but you don’t have the 40 Social Security credits (generally, 10 years of work) needed to receive a retirement benefit? Well, if you’re single, absolutely nothing. Yes, that’s correct, if you’re single and do not have the 40 required credits, you will NOT receive a Social Security retirement benefit.
If you’re close to the threshold, we strongly advocate that you consider getting a part-time job to push you above the 40 credits needed so that you can at least benefit from the money that you’ve contributed in past years.
Similar rules apply for married couples, however, in a case of a married couple, the individual with less than 40 credits of coverage may at least still qualify for a spousal benefit.
5. Unless You File, You Won’t Receive
Believe it or not, Social Security doesn’t always know to whom you are married, whom you’ve divorced, whether your spouse or ex-spouse(s) has died, whether you have young children, etc. It knows very little about your family. So if you are eligible to collect benefits based on your work record, in many cases, there is a good chance that you will be eligible on another family member’s record or they will be eligible on yours.
It’s important to note here that Social Security will not proactively notify you that you’re eligible for benefits, so it’s important to study the rules or work with a Social Security advisor who can help you make sure that you know what you’re entitled to and when. When it comes to Social Security, as with many things in life, timing is critical to maximize your benefits.
The Bottom Line
Properly coordinating and timing benefits will remain critical for everyone that needs to claim Social Security. It is critical to pursue strategies that maximize spousal benefits and increase delayed retirement credits. After all, it is far too easy to make without the proper guidance and understanding.
Whether any of the strategies above are right for you requires careful analysis as each situation is different.
Until Next Time,
Matthew Allen is the Co-Founder/CEO of Social Security Advisors and creator of the new course Maximizing Your Social Security produced in conjunction with Weiss Educational Services. Matthew has helped thousands of seniors maximize their Social Security benefits and avoid costly mistakes when filing. Matthew has been at the forefront of financial services for over a decade. In addition to co-founding Social Security Advisors, Matthew also founded The Universal Group of Companies, a private investment firm, in 2004. From 2000 to 2004, Matthew was a NYSE Market Maker with LaBranche & Co., a Fortune 500 New York Stock Exchange firm.