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A Lucrative Social Security Strategy Is Ended

Over the past several years, an increasing number of Social Security recipients have used a lucrative strategy known as “file and suspend.”

Unfortunately, the ability to use that strategy will soon end: Congress and President Obama did away with it in the federal budget deal signed into law last week. Within six months, file and suspend will be a thing of the past. However, those who are eligible for the strategy during that window will still be able to take advantage of it.

File and suspend has the potential to increase a couple’s lifetime benefits by hundreds of thousands of dollars in some cases. Here’s how it works: At full retirement age (66 or 67, depending on when you were born), the primary earner applies for Social Security benefits, but immediately directs the Social Security Administration to suspend those benefits.

Claiming benefits allows the lower-earning spouse to begin drawing claim spousal benefits—half of the principal earner’s benefit. By suspending the benefit, the breadwinner allows his benefit to grow substantially each year. Thus, the couple has opened the benefit spigot for the secondary earner while the main earner’s benefit grows.

The file-and-suspend strategy is based on language in a 2000 law that updated Social Security rules. Many in Washington have long viewed file and suspend as an unintended loophole that is too expensive for the Social Security fund to support. Now, they’ve closed the loophole.

Under the new budget, file and suspend will not be available for those who turn 62 after 2015. The rule takes effect in six months, meaning those who will be eligible between now and then still have the ability to use file and suspend. Those who are already using file and suspend are grandfathered in and won’t be affected by the change.

While file and suspend will soon disappear as an option, Social Security planning can still allow you to maximize your benefits. The key is understanding that your retirement benefits grow the longer you wait to take them (until age 70). Between full retirement age and age 70, your annual benefit grows at 8% a year. So the longer you can delay taking benefits, the more it can pay off. Of course, you must have secure, reliable income to support yourself during the period you delay taking Social Security.

With elimination of file and suspend, the government has changed the shape of the retirement-funding puzzle. But the Steel Peak team is here to help you fit the pieces together to create your best retirement. Don’t hesitate to reach out if you’d like to discuss your retirement planning needs.