Using a reverse mortgage to replace Social Security “File-and-Suspend” strategy

Social Security income strategy by leveraging a reverse mortgage loan to receive maximum income.

Reverse mortgages are being touted as a way to help seniors supplement their Social Security income, especially now that a once popular filing strategy has been eliminated.

If you were counting on using the Social Security “file and suspend” technique once you reached full retirement age (age 66), you probably heard that as of earlier this year, it is no longer an option.

The Bipartisan Budget Act of 2015 stopped the loophole that many believed only benefitted wealthy recipients of Social Security.

How File and Suspend worked
The file and suspend strategy used to work for married couples who could claim spousal benefits. One spouse would file for Social Security income upon reaching the full retirement age of 66, then immediately suspend those payments. However, the other spouse would continue receiving the “spousal benefit,” typically equal to half of the full benefits.

The rationale for doing this is that the couple would receive some Social Security income, but the main benefit amount would grow at about 8 percent a year until it was unsuspended at age 70, the maximum age recipients can wait to file for benefits. If the second spouse receiving spousal benefits also worked and earned Social Security benefits, he or she could delay them until age 70 1/2 as well.

The new law, which took effect in May 2016, suspends both the main benefit and the spousal benefit if Social Security benefits are suspended. Beneficiaries can also no longer receive a lump sum repayment of advantages that have been withheld. In short, there is no longer an incentive to file and suspend Social Security payments, which was one of the intentions of the new law.

Replace file-and-suspend income with a reverse mortgage
To help replace the hundreds of dollars in monthly income that some seniors may no longer have access to, some experts are touting the benefits of reverse mortgages.

Though reverse mortgages were traditionally intended to help cash-strapped seniors generate extra income from their home equity, their flexibility and versatility have made them a valuable retirement income planning tool.

One strategy is to use reverse mortgage proceeds to delay taking Social Security benefits. That’s because the longer you wait to start receiving Social Security benefits, the higher your monthly payment.

If a person’s monthly Social Security benefit equaled $2,000 at age 66, the spousal benefit would be $1,000. Under the old file and suspend strategy, one spouse could file for benefits then suspend them, but still have his or her spouse collect the $1,000 spousal benefit. Then at age 70 1/2, their main monthly benefit would increase to about $2,800.

Without file and suspend as an option, the couple would either have to draw full benefits at age 66 or find another source for the $1,000 in income provided by the spousal benefit.

A reverse mortgage can be that replacement. A couple, both age 66, with a $300,000 home fully paid for could obtain a reverse mortgage loan amount of about $156,000. Setting up a line of credit, they could withdraw $1,000 for five years, after which they would owe roughly $68,000.

At age 70 1/2, they can then file for Social Security and receive the maximum withdrawal amount. If Social Security along with other retirement assets is enough to live on, they can stop drawing the reverse mortgage proceeds. The loan will continue to accrue interest and other costs until it’s repaid, but the additional principal will not be added to the loan. Also, the line of credit will continue to be available if the couple experiences income shortfalls during retirement.

When considering this and other strategies using a reverse mortgage, you should always consult with financial experts who can assess your individual situation.