"File-and-suspend" is a strategy that many married couples have employed to maximize their Social Security benefits. In this strategy, one spouse files for a benefit but suspends payment — in other words, notifying the Social Security Administration that the filer is eligible but chooses to delay accepting his or her payments.
This acknowledgement allows the other spouse to file for spousal benefits under a restricted application based on the filing spouse's working record. By submitting a restricted application instead of a regular one, a filer is not considered as having filed for both a spousal benefit and a benefit based on his or her own work record. Normally, a first-time filer will receive the larger of the two.
This strategy allows the couple to live off of spousal benefits while gaining delayed retirement credits on both accounts. Delaying benefits by one year after full retirement age (FRA) increases a person's benefits by as much as 8%. If both spouses are able to delay for multiple years, the increases add up to a sizable collective benefit by age seventy when the filing spouse can resume benefits and the other one can file on his or her own record. The same strategy has been used for dependent child benefits as well.
Unfortunately, this strategy will not be available for much longer. The file-and-suspend retirement strategy will end as part of the recently passed budget bill.
Those who are age 66 now or will be within the next six months still have time to execute a file-and-suspend strategy (as measured from the day the bill is signed by President Obama). Families that are already using a file-and-suspend method are grandfathered in and may continue with their plans. Others are simply out of luck.
File-and-suspend itself is not ending. You can still file and choose to suspend your benefits, thus accumulating delayed retirement credits. What is ending, is the ability for a spouse to file for spousal benefits while the filing spouse defers their payments. Spousal benefits will require that a spouse is actually receiving benefits at the time of filing. In essence, this ends the ability for couples to accumulate delayed retirement credits on both of their accounts while receiving any money from Social Security.
If you are below your FRA but are at least 62 years old, you can still file for a restricted application for spousal benefits only, starting at FRA (age 66 if you are 62 or greater now).
Those who are widowed are not affected by the changes, but divorcees may be. The existing law allows those aged 66 and above who are divorced and married for at least ten years to claim benefits on the earnings of their former spouse, while letting their own accounts accrue delayed retirement credits. The ex-spouse must at least be 62 years old (of a sufficient age to file a claim on their own account, even at a lower rate).
The above restricted application rule allows spouses who turned 62 this year or are older to take advantage of this strategy. Younger filers will have to choose between claiming their own earned benefit or a spousal benefit.
The legislation did not specify what happens when an ex-spouse suspends their benefits. Does the new file-and-suspend restriction prevent spouses from filing spousal benefits on an ex's suspended account? Do the rules that allow divorcees to collect on ex-spouse's accounts whether or not the ex-spouse has filed for benefits take precedence? If you fall into this situation, keep an eye out for clarifying legislation and check with your local Social Security office for the most current information.
If you can still take advantage of the file-and-suspend window and it makes economic sense for you to do so, act quickly. Otherwise, if you want to delay your Social Security benefits and accrue delayed retirement benefits, you will have to look at IRA/401(k) distributions and other means to get you through the early years of retirement. Of course, you could just keep working if that makes the most sense for your situation.