Lump sum payout still an
option for those who filed by April 2016 deadline
February 5, 2020 By Mary Beth Franklin
Before
Congress changed the rules regarding Social Security claiming strategies in
late 2015, many financial advisers enthusiastically promoted ways to maximize
lifetime retirement income benefits for married couples and eligible divorced
spouses. But the Bipartisan Budget Act of 2015 put an end to two lucrative
claiming strategies, which legislators dubbed “unintended loopholes”.
The
first of two creative claiming strategies to bite the dust was known as “file
and suspend.” It allowed individuals at full retirement age or later to file
for their Social Security benefits and then immediately suspend them, allowing
their retirement benefits to grow by 8% per year for every year they postponed
claiming beyond full retirement age up to age 70.
In the
meantime, the act of filing for Social Security would trigger benefits for
eligible family members, such as a spouse, minor dependent child or permanently
disabled adult child.
The
strategy also allowed anyone who filed and suspended their benefits to request
a payout of all suspended benefits in a lump sum in lieu of receiving delayed
retirement credits.
Because
this strategy is no longer an option for new retirees, some advisers have
forgotten the valuable benefits available to people who exercised the strategy
before the April 29, 2016, deadline.
“A
soon-to-be 70-year-old prospect informed me that an attorney and her financial
planner had her file and suspend when she reached full retirement age at 66,” a
financial adviser wrote to me in an email recently. “They said that at age 70,
she will have the option to receive her full retirement age benefits plus 32%
in delayed retirement credits or elect to receive her age 66 benefit and then
get a lump sum payment of the money not received over the last four years.”
“I
can’t find anything that validates that information,” he wrote. “Am I missing
something?”
Lucky
lady! Her forward-thinking financial planner and attorney gave her good advice
four years ago. Individuals who filed and suspended by the end of April 2016
deadline are grandfathered under the old rules. They can request a lump sum payout of
all suspended benefits in lieu of receiving delayed retirement credits for the
same period. If she does nothing, her benefits — including four years’ worth of
delayed retirement credits — will automatically begin the month she turns
70. Social Security benefits are paid the month after they are due, so
April benefits would be paid in May.
The
last group of people to benefit from the file-and-suspend claiming strategy
turn 70 in April. They will automatically receive their maximum retirement
benefit when they turn 70 or they could request a lump sum payout of suspended
benefits. After that, this claiming strategy will be one for the history books.
Individuals
are still allowed to suspend their Social Security benefits at full retirement
age or later in order to earn delayed retirement credits, but the rules are
different.
For
those who suspend their benefits after April 29, 2016, anyone collecting on
their record, such as a spouse, would also lose their benefits. And if they
suspend their benefits, they cannot collect benefits on anyone else’s record,
such as their spouse, during the suspension.
However,
there is one major exception. If you are a divorced spouse, you can continue receiving
a divorced spousal benefit even if your ex-spouse voluntarily suspends his or
her retirement benefits.
So who
may want to file and suspend Social Security benefits under the new rules?
Assume
a husband and primary breadwinner claimed his Social Security benefits at 62,
permanently reducing his benefit by 25% because he claimed four years before
his full retirement age. Perhaps he didn’t realize that by claiming reduced
benefits early, his wife would
also get a smaller survivor benefit if he died first. Survivor benefits are
worth up to 100% of what a deceased worker was collecting or entitled to
collect at time of death. A smaller retirement benefit translates into a
smaller survivor benefit.
Once
that husband reaches full retirement age, he may want to voluntarily suspend
his benefits. Although his Social Security payments will stop, his benefits
will earn delayed retirement credits worth 8% per year up until age 70.
The
math works like this. At 62, he began collecting 75% of his full retirement age
benefit for four years. At 66, he suspends his benefits and they begin to grow
by 8% per year for a total increase of 32%. When you multiple his reduced
benefit of 75% by 1.32, his benefits at age 70 would be worth 99% of his full
retirement age benefit amount. If he dies first, that’s how much his widow
could collect in survivor benefits, assuming she was at least full retirement
age at the time.
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