File-and-suspend is (was) one of several “claim now, claim more later” strategies for maximizing Social Security benefits, primarily beneficial for married couples. It typically involved having one spouse claim spousal benefits for up to four years between ages 66 and 70 before switching to his or her own larger retirement benefit. This allowed the higher-earning spouse to delay claiming and increase future benefits while the spouse received a smaller benefit for a few years.
That’s an over-simplification, but unless your household is grandfathered in, the details of a now-defunct strategy probably aren’t important to you. According to Michael Kitces, “restricted applications. . . to receive just spousal benefits and not individual retirement benefits” are grandfathered in for those born in 1953 or earlier, but “the new rules limiting suspended benefits will apply to anyone who tries to file-and-suspend after a 6 month grace period beyond the effective date of the legislation.” In other words, unless you’re at least 65 ½ years old Monday (assuming the bill is signed into law then as expected), file-and-suspend is no longer an option for you.
The end of the “file-and-suspend” Social Security claiming strategies won’t affect most households.[Tweet this]
The press had raised alarms recently over an expected huge increase in Medicare Part B premiums for 2016 as reported, for example, in a recent article at AARP. The increase would have resulted from an obscure part of Medicare law that ties COLA increases to Part B premiums, combined with the lack of a Social Security COLA increase announced for 2016.
The Washington Post reports that the "Budget deal blunts, but doesn’t erase, increase in Medicare premium". Prior to the new law, about one in three older Americans would have seen a premium increase just north of 50% in 2016, but that increase will now be about 17%. According to the Post, the group subject to the increase includes "people who do not collect Social Security, will be enrolling in Medicare’s Part B next year for the first time, have incomes great enough that they are charged higher premiums, or are poor enough that they also qualify for Medicaid." Again, two-thirds of recipients won't be affected either way.
What does all this mean for the typical retiree? The changes to Social Security rules mean that, unless you are grandfathered in by your age, strategies like file-and-suspend are no longer available to you. If that was part of your retirement plan, you need to revise it. If you were worried about a Medicare Part B premium spike next year, it won’t be as breathtaking as the press has led us to believe, but that doesn’t guarantee there won’t be dramatic premium increases in future years. Remember, the spike was related to the fact that there was no Social Security COLA adjustment for 2016.
It also means that books and software about Social Security benefits optimization are now outdated. Mike Piper says he plans to update his book, Social Security Made Simple, very soon. Laurence Kotlikoff’s MaximizeMySocialSecurity website currently posts a warning on the site’s opening page saying, “Alert! Major SS Benefit Changes Pending!” Kotlikoff has also promised updates to his software as soon as possible.
In the meanwhile, if you are interested in the fine print, Wade Pfau, Mike Piper and Michael Kitces are my go-to guys for Social Security issues. Kitces has an excellent post at his Nerd’s Eye View blog. I also recommend Piper’s post at the outstanding ObliviousInvestor blog and the excellent discussion at this Boglehead’s forum. Robert Powell has a very readable column on the topic at MarketWatch.
Sometimes the early reads on law changes gain clarity over the following days and weeks, so waiting until the dust settles and the books and software have been updated to see the law’s impact on your own retirement plan might be the best approach.
The end of the “file-and-suspend” Social Security claiming strategies won’t affect most households. Nearly half claim benefits at age 62, the earliest possible age, probably because they can’t afford to delay the income according to Motley Fool. U.S. News reports that only about 5% delay claiming until after full retirement age to maximize their longevity insurance. About 2% claim maximum longevity insurance at age 70.
The file-and-suspend strategy required the lower earning spouse to delay claims until full retirement age (currently 66 for those born between 1943 and 1954) and the higher-earning spouse to delay even longer (to 70 for maximum benefit).
No huge Medicare premium spike is good news for retirees and no more file-and-suspend is maybe not so good. This week's news illustrates a reality of retirement financial planning: good news or bad, very little is cast in stone.
On a related note, see the sidebar for three timely pieces on Social Security written by Wade Pfau at the Retirement Researcher blog.
Second, thanks to those of you who responded to my survey regarding retiree attitudes toward investment portfolio volatility when non-discretionary expenses are safely covered by Social Security benefits, pensions and annuities. I promised to share the results here and, based on the first 100 responses, they are as follows:
- 15% would take maximum risk with their investment portfolio if they knew non-discretionary expenses were safe,
- 2% said they wouldn't invest retirement savings in stocks even if non-discretionary expense were covered,
- 83% said that, even if they felt non-discretionary expenses were safely covered, they wouldn't risk a huge loss such as they might have seen in the 2007-2009 bear market with an all-stock portfolio.
Please don't confuse this with a scientific poll – it is far from it – but it does suggest that many retirees still worry about portfolio volatility even when the rent and grocery bill are safe.