Understanding the SSI ‘Suspend & Restart’ Rule

‘Super Size’ your client’s Social Security Income

By Martha Shedden and Frank Horath, ClientFirst Financial

Introduction

Understanding how the Social Security Suspend and Restart Rule works can open doors for advisors to a large new pool of prospects while significantly increasing and adding value to their existing client base. Many – actually over 50% – of retirees claim their Social Security at early age 62, as soon as they are able to. Many of these early claimants may later regret the decision and wish they could make a different choice.

Imagine that you are the one, or one of only a few, advisors in your community who could offer them, not one, but two opportunities to “Supersiize” their Social Security income. Most early claiming retirees probably did not work with a financial advisor or understand the strategies available to maximize and optimize their choice. For some, claiming early is an absolute necessity and they need the immediate income. For a large number, though, they simply do not understand the financial ramifications they are imposing on themselves. It is not uncommon for them to later learn that they could have greatly increased their lifetime income by making a different choice.

Only a handful of consumers – and advisors – realize that once they’ve claimed Social Security, there is another move they can make once they reach full retirement age to capture more lifetime income.

A Suspend and Restart Case Study: You Haven’t Lost it All Yet!

Learning the Suspend and Restart concept can perhaps best be illustrated by examining a client case study. Let us take a look at Jim and Linda who are both retired and sitting in your office. Jim is about to turn 66 and has a life expectancy (LE) of 85. Linda has just turned 63 and she chooses to project her LE to age 95. Both Jim and Linda claimed early and began collecting their Social Security at age 62. So even though Jim had a Primary Insurance Amount (PIA) of $2,200 and Linda’s PIA was $1,400, Jim is only collecting 75% of his PIA, or $1,650 per month and Linda is collecting only $1,050 (Figure 1).*

Both Jim and Linda have been collecting Social Security for over 12 months, the window in which they could have withdrawn their application (more on this to follow). So there is nothing they can do now to capture more lifetime Social Security income, correct? Most clients and financial advisors would answer, “Yes, that is correct”.

However, there is a relatively unknown and even more rarely exercised technique called the Voluntary Social Security Suspension, or the Suspend and Restart strategy, which can help Jim and Linda to capture additional lifetime income. If Jim and Linda continue to take their monthly income amounts between ages 62 and their dates of death, they will receive $964,800 in total income. If, however, they instead chose to use the Suspend and Restart or “Supersize” (our term) strategy, they can capture a lifetime total of $1,060,992, an increase of $96,192 (Figure 2).

The strategy works like this–once someone reaches their full retirement age (e.g. 66 for those born between 1943 and 1954), they can file for a Voluntary Suspension of benefits, in effect turning off their monthly Social Security income check, and restart it at a later date up to age 70. In this case, both Jim and Linda opt to do this between ages 66 and 70.

During this four year window, each of their income benefits build by 8% per year due to the delayed retirement credits. This provision is the tool which allows them to “supersize” their monthly Social Security income check. Then, at age 70, they resume receiving their monthly Social Security checks, which have grown by a total of 32%. This increase essentially brings the monthly amount up to almost the same as they would have received if they had waited to claim until FRA and received their full PIA. And, as always, this is then the amount that they will both receive for the rest of their lives.

Figure 1: Jim and Linda Claim at Age 62

Figure 2: Jim and Linda Claim at 62, Suspend at FRA, and “Supersize” to Age 70

Now, let us take a closer look at Figure 2. Notice how in this case Linda, due to her younger age and longer life expectancy, will collect much more as a widow during her survivor years by her and Jim using the “Supersize” strategy than if they had continued with their early claiming strategy. Due to “Supersizing”, Linda collects $2,178 per month rather than $1,650 /month and her cumulative income during her 13 years of widowhood will be almost $340,000. If they had continued to collect from age 62 on, her income during these years would be about $257,000. The majority of the additional lifetime income from their “Supersize” strategy will significantly benefit the widow in this case.

As with all Social Security maximization strategies, especially for couples, the Social Security “vitals” (PIA, LE, ages and relative ages of each person in a couple) are what determine the ultimate value of each optimization method.

Could have, would have, should have. . . The Reset Rule or Application Withdrawal and Re-filing

Okay, so now let us rewind to four years earlier when Jim was about to turn age 62 and Linda 59. They are in your office wanting to know how and when to take their Social Security. Although they certainly can file at 62 for benefits, most Americans will obtain greater lifetime income amounts by waiting, if possible, until they reach age 66 or even 70. But this can, in certain instances, be a gamble because your client’s total income amount received will depend on how long your client lives.

Prior to December 2012, if retirees filed for Social Security benefits and later realized they had made a mistake, they were able to withdraw their application and re-file at any time using a different strategy. Sure, they were required to pay back the money they had received up to that date, but no interest was charged and this essentially allowed for interest-free loans for an unlimited time. With passage of the 1-year rule, however; retirees are limited to one Reset and it must be enacted within 12 months of the date benefits were first received.

If your clients claim their benefit early at age 62, they receive a smaller check but for a longer period of time. If they claim later at age 66 or 70, they will receive a larger check for a shorter time period. Age 80 is often called by many the break-even age. If you make the assumption that your client(s), married couples in particular, might live beyond this age, then it may make sense for them to claim Social Security at a later age. Current studies show that for a healthy married couple age 65 at least one person has a 50% chance of living to age 921.

Perhaps within that first 12 months of filing, Jim and Linda attend a seminar of yours, or maybe they are already clients of yours. You have the opportunity to discuss this decision with them, educating them on the Reset Rule and assisting them with an application withdrawal and refilling using a strategy that will benefit both of them and give them a substantial amount of additional lifetime income. Strategies available to married couples such as “file and suspend” and filing a “restricted” application are beyond the scope of this paper, however; they can often lead to a substantial amount of additional lifetime income.

In many cases it is the woman who is the “driver” of a married couple’s important retirement financial decisions. She is especially wise to pay attention to her and her husband’s Social Security claiming strategies. As the likely survivor who will “inherit” the higher of a couple’s benefit amounts and the one traditionally most likely to have the (historically) lower PIA, she has the most to gain/loose from the Social Security claiming strategy. Therefore, this is an excellent issue to become fluent in, in particular if you serve female retirees, widows, or divorcees in your practice.

Summary

Helping your clients choose their Social Security income benefit may be one of the most valuable financial planning services you can provide to them. For many of your clients, this may be one of the most important financial decisions they make in their lifetime. Singles, and especially married couples, can miss opportunities in some instances to collect in excess of $300,000 of additional income over their lifetime(s) by making Social Security income election decisions that are not best suited for them.

Furthermore, only a handful of diligent pre-retirees and retirees investigate this important retirement financial decision at a deeper level. Left to their own research and decision-making, the majority of retirees claim Social Security based on their own earnings record at the earliest date they are eligible, age 62 for the current group of retirees. Not only are they setting their monthly income to a reduced amount for the remainder of their lives, but they may also be missing out on higher benefits through the coordination of spousal benefit rules and planning to capture the maximum survivor benefit.

So, as stated above, there is ample space (i.e. lack of supply and plenty of demand) for advisors to capture and gain market share by becoming a Social Security expert within their community. As a competent advisor, you will need to understand the concepts and tools put forth in this snapshot report. If you choose to specialize in this valuable niche, you will need to “bolt-on” specific planning and/or software tools to help your clients optimize their Social Security income election.

As a financial advisor, helping your clients and prospects maximize their lifetime Social Security income benefit will require some education, good planning, and the application of smart, best-in-class decision tools. The reward will be an increased ability to attract and retain clients by offering a service that sets you apart in your community. The 10,000 Baby Boomers facing this decision every day are eager for information and will respond to seminars on this topic at a rate much higher than other financial planning topics. An added bonus is that by offering Social Security advice, you will see a significant increase in response from women – married, single, divorced and widowed – seeking financial planning assistance.

The financial demographic of people seeking your expert advice on electing their Social Security income is quite wide. Some will simply need the cash flow at age 62. Many of your clients with retirement assets will want to optimally synchronize the election of their Social Security income within the context of drawing down from their other retirement assets. And the affluent, contrary to what many people assume, are often the most keenly interested in “wringing every dime” out of the Social Security system, in particular if you call these smart strategies to their attention.

We suggest you take some time to survey the competitive landscape in your community for your new-found Social Security income planning niche. You will most likely find that very few, if any, financial advisors in your community help their clients elect Social Security income the right way. And no one is educating CPAs and attorneys, who are quite willing to outsource expertise for their clients on this very relevant topic.

In this snapshot report, we highlighted two Social Security rules that are critical to early retirees, not only those who have yet to make their election decision, but even those who have started receiving benefits but realize they may have made a mistake. By understanding these two rules you will be in the position to guide your pre-retiree and retired clients and prospects to make better Social Security income claiming decisions.

Most importantly, the Social Security income election decision should NOT be made in a vacuum. If it is within the scope of your practice and you have the financial planning resources (i.e. the right software), you can help your clients integrate their Social Security income election in an intelligent manner within the context of their “big-picture” retirement income decision.

1 Source: Annuity 2000 Mortality Table, Society of Actuaries. Figures assume you are in good health.

2 This article may contain tax and tax planning discussion/examples that should be reviewed by your personal tax and/or legal advisers to determine if they are appropriate for your particular situation and comply with local law. ClientFirst Financial does not render tax or legal advice.

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