Update Nov. 15, 2015: The Budget Bill signed into law in late 2015 dramatically changes the popular “File and Suspend” strategy discussed here. People who can take advantage of it by April 1, 2016 are grandfathered, but depending on your birth date, the strategy has gone away for other folks. See our article “How the New Social Security Claiming Rules Affect You” for more.
July 16, 2014 — A recent story in MarketWatch by Robert Klein highlights a little known but interesting wrinkle to the “file and suspend” strategy for maximizing Social Security benefits. The wrinkle can result in a significant windfall of cash, which might be particularly useful if you contract a life-threatening illness before age 70.
For background, the file and suspend strategy is mainly taken to allow one spouse to collect the spousal benefit while the other spouse continues to accrue benefits past Full Retirement Age (age 66 to 67 for baby boomers). In this strategy one spouse at age 66 (or higher) files for Social Security benefits, but then immediately suspends. That allows his or her spouse to begin collecting a spousal benefit (50% of what the primary spouse receives at age full retirement age). The spouse collecting the spousal benefit has the option to later on collect on his own earning record, if higher. Meanwhile the spouse with suspended benefits gets annual delayed retirement credits of 8% a year from age 66 to 70, at which point the benefit reaches its maximum.
Klein notes that the windfall from this strategy can be realized by single people as well as married couples. Here is how it works. Assume that the higher earner filed and suspended at age 66, and planned to collect the 8% annual credits in their monthly benefits that start at age 70. But somewhere before his or her 70th, the earner either needs a significant cash infusion, or realizes that his life expectancy is no longer so great. He can apply for a cash benefit of all of the benefits he would have received from age 66 to that point, plus any COLAs. In the example cited by Klein, that would be “a lump-sum payment of $126,816 ($2,642 x 12 months x 4 years) plus COLAs” for a person who was eligible for the maximum monthly retirement benefit at age 66, and who applies for this payment a month before their 70th birthday. According to the article, you would forfeit the 8% annual credits from age 66 to the time you requested the payment.
It is interesting to know that you have the option to receive this cash benefit. But you have to know where that makes enough sense to forgo the higher benefits from age 70 you give up to get it. Certainly it makes sense to take the cash if you know you aren’t going to live past your 70’s (and assume your spouse won’t either). If you really need the cash for some reason, that is another.
Knowing your options for maximizing your Social Security retirement benefits is an important part of your retirement financial picture. The factors are complex – the life expectancies of you (and your spouse), your ability to self-finance if delaying benefits, and the relative ages of you and your spouse. The issue is worth studying and getting qualified advice on.
About Robert Klein: Klein is President of the Retirement Income Center in Newport Beach, CA. The Retirement Income Center helps people plan, manage, and protect their retirement income.
For further reference:
MarketWatch Article: Social Security Loophole’s Huge Windfall Opportunity
Results from our “What You Know About Social Security” Quiz (with links to more)