Social Security file and suspend

[kathyc2]

The popular planning strategy has been eliminated via the current budget deal.

[TaxGuyBill]

Is it eliminated NOW, or when does it start?
If somebody has already done this, it will continue, right?

I have a client planning to do this in the next month or two.

[kathyc2]

Is it eliminated NOW, or when does it start?
If somebody has already done this, it will continue, right?

I have a client planning to do this in the next month or two.

I haven't been able to find the actual text of the bill online, but various reputable sites are saying no new claims after 6 months of the passage of the bill (today).

[JohnH]

I have a wonderful link to the blog of someone I know to be very knowledgeable on this very subject.
His information is always timely and reliable.

Due to recent changes in forum rules, I can't post a direct link. However, if you will google "Michael Kitces" and follow the link to his blog, I think you will get answers to all your questions about "File and Suspend" or "Restricted Application".

[taxea]

why would anyone want to do this? It's your money, take it while you can get it.

[JohnH]

Sure. If you don't care anything about planning for the future and a guaranteed 8% return on your investment (coupled with a possibilty of a do-over in case you guess wrong) isn't apppealing, then by all means take it now. No sense wasting time maximizing your benefits - just leave it on the table.

[FEDUKE404]

Not really

why would anyone want to do this? It's your money, take it while you can get it.

I respect the reasoning behind when/how a person chooses to start collecting Social Security benefits.

Many people start collecting Social Security at age 62, and thereby incur a permanent reduction in benefits.

Many people (especially those with W2 wages) start collecting at their full retirement age, which for current retirees is ~66 YOA.

Some people choose to defer collecting benefits to a later age. (A frequent response is "Where else can I get an 8% return? ?")

Everyone's personal situation differs, and they should make their own decisions with a full awareness of the rules involved.

There is no "it's correct!" answer to the question, with the possible exception of someone who knows EXACTLY what the future holds.

FE

[kathyc2]

why would anyone want to do this? It's your money, take it while you can get it.

The file and suspend was an unintended consequence of the 2000 SS reform. In short, if handled properly, one spouse could let their benefits continue to grow, and while their benefits are growing, they could draw 1/2 benefits based on the other spouses benefits.

It was essentially double dipping, but it was a fun planning tool to get the most out of benefits.

[Rapid Robert]

a guaranteed 8% return on your investment

This is bad math that somehow gets repeated over and over. For simplicity, let's assume for person A and person B that the annual benefit is $24K at full retirement age, and maximum delay is 5 years, when the benefit would be $33.6K. A starts at FRA, and suppose he saves all payments and gets a meager 1% return on savings, his total after five years is $123.6K. Meanwhile B delays, so in five years his total is zero.

Now, beginning year six, B starts getting $9.6K/year more than A, which he also invests at 1%, while A continues to let his nest egg accumulate 1% year as well. (let's assume that both A and B consume the remaining $24K/year that they each get, rather than save it -- in this regard, they are still exactly equal).

It will take about 14 years for B to catch up to A, by which time they will both be 85 years old, if they haven't died yet. So, if they end up even at age 85, and A is ahead of B for all the years before that, how is that a "guaranteed 8% return on investment" for B? Yes, after age 85, B does much better than A, but that seems a pretty risky gamble to have taken 20 years earlier.

Edit - I guess you could say it is an 8% return on investment, but it doesn't start for another 20 years.

[JohnH]

The risk in retirement is not that you die before breaking even, but that you live long enough to beat the actuarial tables. So delaying benefits is additional insurance against outliving one's assets. I didn't run your numbers, but you also omit the possibility that the "invested" funds suffer a loss of principal, which can easily happen either via adverse market forces or via the hidden taxation resulting from inflation.

You also fail to take into account the very real tax haircut, which will almost certainly exist because virtually anyone who can afford to bank all the SocSec benefits during the "bonus" years must have other sources of income, usually taxable. That reduces the amount available to invest by at least 15% of the taxable amount of SocSec benefits (up to 85%). So that can easily be an annual drag of up to 12.75% of the benefit. In that case, you have to earn 14% in order to net 1.25%, not counting any transaction costs. One might say the taxes could be paid form the non-SocSec income, but that's a dodge. Bottom line is you can't really keep all the benefit plus its earnings without suffering some offsetting decrease in total assets, except in very rare situations.

Of course, there is someone who benefits no matter what happens -> the financial advisor collecting commissions from "managing" (or mis-managing) the money.

Viewed another way, delaying benefits is the functional equivalent of buying a deeply discounted Single Premium Income Annuity (the only type of annuity that most people should buy in the first place). I'll stick with the 8% for the purpose of analysis. A thorough analysis will probably reveal the 8% to be a conservative number. And we haven't even touched on the overwhelming math with the "free spousal benefit", which really is the closest thing to a free lunch which exists.

[Rapid Robert]

The risk in retirement is not that you die before breaking even, but that you live long enough to beat the actuarial tables. So delaying benefits is additional insurance against outliving one's assets. I didn't run your numbers, but you also omit the possibility that the "invested" funds suffer a loss of principal, which can easily happen either via adverse market forces or via the hidden taxation resulting from inflation.

You also fail to take into account [...]
Viewed another way, delaying benefits is the functional equivalent of buying a deeply discounted Single Premium Income Annuity (the only type of annuity that most people should buy in the first place). I'll stick with the 8% for the purpose of analysis. A thorough analysis will probably reveal the 8% to be a conservative number.

I deliberately assumed the most conservative type of investment, a savings account with 1% interest. If that is going to lose principal, then we all have much bigger problems to worry about. I also didn't take into account COLAs, etc. I also assumed a 40% increase in benefits (8% x 5 years) when I believe in fact it should only be 32%. And I (and you) also didn't take into account future developments that might drastically reduce future SS payouts, such as means testing. The argument about what could go wrong 20 years from now is exactly the one I am making for why it's not necessarily a no-brainer to delay benefits.

My key point, which I don't believe you have refuted, is that even if there is a "guaranteed return on investment" from delaying benefits, it doesn't kick in until quite a few years down the road. Most people who hear the "8%" figure don't realize that. To back up my point, note how seldom anyone, including you, likes to "run the numbers" to prove the result. If they did, many people would realize that delaying benefits is supposed to be, and mostly is, actuarially neutral. Or put another way, if this is such a great deal, then why doesn't everyone realize that they should buy a deeply discounted Single Premium Income Annuity? If I'm going to get an 8% guaranteed return, surely it would pay to max out my home equity via a 5% loan to make the up-front payment, right?

[JohnH]

Apples and oranges don't add well.

Just because someone puts numbers out there doesn't mean I need to "run them". But I notice you didn't run my numbers on the tax haircut either. That's the greatest weakness in the argument, IMO. As stated before, I'll stick with the 8% as a reliable working number.

It is true that waiting isn't the best alternative for everyone. Some people who need the current income should not consider delaying benefits, because frankly they don't have a choice. People who are in bad health shouldn't wait since it is likely they won't beat the actuarial tables.

But anyone who is in reasonably good health and can afford to defer should strongly consider doing so. Everything has risks, but in most of those situations the smart move is to defer. Generally the only ones who benefit financially form their choice not to defer are the financial advisors who recommend this course of action.

[TXEA]

[QUOTE=Rapid Robert;176148]This is bad math that somehow gets repeated over and over. For simplicity, let's assume for person A and person B that the annual benefit is $24K at full retirement age, and maximum delay is 5 years, when the benefit would be $33.6K. A starts at FRA, and suppose he saves all payments and gets a meager 1% return on savings, his total after five years is $123.6K. Meanwhile B delays, so in five years his total is zero.

The problem with the analysis of saving the entire amount of the SS Benefit is that those who can do that do not need the benefit of a higher payment to maintain a basic standard of living. I agree with you that the average breakeven is about 14 years. I have done the math many times.

The benefit of delaying is for the worker who has not saved enough for retirement once he/she reaches about age 60 and is physically able to keep working. Should they continue to work to age 70 and get the 33.6K (as in your example) they will be far better off throughout retirement than if they take the benefits at FRA. Now, the logical argument is keep working at FRA and also collect the benefit. Then, save the money for retirement, pay down debt, etc. The problem is that most people that end up at age 60 with insufficient assets for retirement ended up in that situation for a reason. Either, they do not know how to manage their money, they make poor financial choices, they are caring for grandkids, or whatever reason.

So, if this person starts benefits at FRA and blows the money (the wealth effect) then they accrued no benefit from starting at the FRA and they are stuck with the lower amount. It is critically important in advising clients on financial matters that even though the numbers are irrefutable, people are not numbers and they sometimes make choices that make the irrefutable numbers worthless.

JohnH's point about protecting against living too long should always be a part of the analysis. The point is not to get every dollar you can while you can. The point is to live comfortably as long as you can in consideration of the other resources available to the Social Security claimant. I have never had a client complain about having too much income in retirement, but I have had a lot of clients who live primarily on Social Security (with some other income) complain that their benefit is not enough. And almost everyone of them elected his/her benefit at age 62 or at FRA.

[Rapid Robert]

But I notice you didn't run my numbers on the tax haircut either. That's the greatest weakness in the argument, IMO.

Well, at least I ran some numbers. And the tax haircut goes both ways. By cramming more income into the post-age-70 years, when RMDs also start, you are almost guaranteed to be paying more tax (higher tax rate) than if you simply spread the same income over more years beginning at FRA. If married, you are also more likely to become a widow/widower at a later age, missing the possible benefits of spreading the income across two taxpayers instead of one during the earlier years.

There are so many possibilities that it is indeed very difficult to pin anything down with certainty, which is my main objection to anyone claiming "where else can I get 8% return on investment?" when in fact there is no guarantee they will get that, or that they can't also get it following a different plan.

Anyway, my "insurance" against running out of money in my eighties and beyond includes my investment in raising 3 kids, not just Soc. Sec. Diversification is the key.

[David1980]

For me, it's not a question about a guaranteed return or maximizing the cash benefit I plan to receive. If I've got too much income in the later years and as a result I have to pay more tax I'm very happy with that outcome. I see social security as insurance rather than as an investment.