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Social Security Loophole Can Lead to Windfall

Category: Financial and taxes in retirement

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.

Bottom Line
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)

Posted by Admin on July 16th, 2014


  1. Sorry, but this all sounds a bit too complicated to me — LOL!

    by Valerie — July 17, 2014

  2. I turned 66 in April and had my first-ever surgery in June which has me thinking about mortality. In running the numbers, it appears that if I start taking SS payments now and die before my 83rd birthday, I win (well, in a manner of speaking). That’s because at 83, the sum of the payments I take between age 66 and 70 will equal the higher payments I would receive by waiting until 70. The way I figure it, if I make it past 83, that will be a bonus for which I am more than willing to be “penalized” with lower payments from that point on. In the meantime, my wife and I can enjoy ourselves that much more for the next 17 years.

    by Larry — July 17, 2014

  3. I should add that at age 83, our expenses should be lower since we are likely to travel less and spend less generally. We should be better able to handle the comparatively lower payments later.

    by Larry — July 17, 2014

  4. I agree Larry! Use the SS money and let your IRA/401K money grow. The less you take out of your savings, the more it will grow. Use the SS money and pull out small amounts of savings and it will still grow. Another subject: According to what I have read, to be eligible for Obama care and to get the credits you cannot make more than $62,040.00. Hub may retire at 63 next year and we will need health insurance. Silver plan in CT with $62K income will cost $5890.00 for two adults. It covers only 70% so you need to get another plan to cover the 30%.

    by Louise — July 18, 2014

  5. My wife and I will be turning 64 this year (2014)and we are beginning to think about the our future and Social Security. Can anyone tell me if we SS combines our benefit or will the benefit be reduced because we are married?
    If it will be reduced can you tell me the formula?

    by LarryD — July 18, 2014

  6. I would like to refer everyone to the article written by Edward Zurndorfer for My Federal Retirement entitled “Understanding the Rules and Limitations for Receiving a Social Security Lump Sum Payment” in which he indicates the following:
    “There is a little known Social Security Administration (SSA) option that allows an individual to receive up to six months of retroactive benefits in a lump sum payment when an individual waits until after their FRA to claim their Social Security monthly benefit”. He says more, including “The SSA offers Social Security recipients who apply for benefits after they reach their FRA up to six months of retroactive monthly benefits, beginning the month they reach FRA. The SSA will not pay, however, retroactive benefits for any month before an individual reaches their FRA or for more than six months in the past”.
    He seems to be indicating there is only a six month retro benefit.
    I am expressing no opinion; just wish to refer those of you who are interested to the article in order to resolve what appears to be a discrepancy in the positions between it and that expressed above by
    Would like to then hear what you have concluded.

    Editor’s note: The source for the Topretirements article was an article on by Robert Klein. We have posted this question to him and his response is below. What we think Mr. Zurndorfer is referring to is a situation where someone doesn’t apply for their SS benefit at Full Retirement Age. Instead of losing everything they were eligible for between the time they were eligible and when they actually applied, they can get a lump sum of up to 6 months. However if the gap was longer than that, they are out of luck This link explains it:
    . Mr. Klein’s article talks about a different situation, where in effect someone reverses their decision to file and suspend just before their 70th birthday.

    by Glenn — July 19, 2014

  7. You are absolutely correct. The article I wrote was a different situation using the file and suspend strategy. As such, the maximum six months of retroactive benefits rule doesn’t apply.

    Editor’s note: Thanks to both Glenn for the interesting question and to Mr. Klein for following up with the clarification. Klein is President of the Retirement Income Center in Newport Beach, CA. His website is

    by Robert Klein — July 22, 2014

  8. This question has been spinning in my head for a while. Thanks for the info and clarifications on different situations. I’m 64 so have a couple more years to consider how to answer this for myself. I also wonder if working FT and taking the FRA benefit simultaneously, rather than waiting for the lump sum, in order to pay off a mortgage and debts prior to retirement would be a good use of the FRA SS benefit. Any thoughts? BTW, I’m single and plan to stay that way.

    by Elaine — July 23, 2014

  9. Elaine, The retroactive lump sum is a bonus. I applied for SS one year after my FRA last year and only learned about this retroactive option by making an appointment at the local SS office to process my SS rather than doing it online. I highly recommend making an appt to discuss the options. The workers are knowledgeable and very helpful. I was informed that I could take a lump sum for six months prior or have $50 more monthly in my soc. sec. checks for the remainder of my life. I needed the extra money and took the bonus which depends on the amount of your earned monthly SS. Multiply the amt x six months. It was a substantial check and was deposited in my account within four days but doubt it would be enough to pay off a mortgage and debts. I am single too and working P.T. If you collect SS before FRA, your benefits will be reduced. If you wait for six months after your FRA, you can collect the retroactive lump sum payment and monthly soc sec. and if you continue to work F.T. you will have a nice amount of money to pay off whatever is required. This is strictly a personal opinion. I would recommend an appt with your local soc sec office to discuss options. I spent months reading about soc sec online but never found any info about the retroactive payment. My tax advisor recommended a face-to-face appointment (had to wait about 2 weeks for appt) to ensure that I did not overlook anything. I am very happy that I followed his advice.

    by Jo — July 23, 2014

  10. With the lump Sum Option, I’m sure that SIGNIFICANTLY more $$$ will go to IRS than if you take monthly benefits. The High $$$ value could put you in a much higher tax bracket.

    by Rich M. — July 23, 2014

  11. Go to www, and search “file and suspend” for info on this option. SSA’s own website is wonderful! You can set up access to your own personal info.

    by Jean — July 23, 2014

  12. Question: Do you need to prove your change in “status” to get this windfall?

    by Lulu — July 24, 2014

  13. We used this “file and suspend” tactic when I reached FRA in January. My husband reached it last year. He filed and suspended and I am currently collecting 1/2 of his benefit while both of our benefits accrue at 8% annually until we file at age 70. Where else these days can you get a risk-free 8% return? It’s working great for us!

    by MARY — July 24, 2014

  14. I’m a retired SSA employee with almost 40 years experience. These “file and suspend” options are allowed under the Social Security Act, but they come at an administrative cost to SSA to handle and are a drain on the SSA retirement trust fund. Delayed retirement credits (DRCs) – the reason for the 8% increase – were intended to “reward” people who worked past full retirement age (FRA) and didn’t receive benefits. In 2000, however, Congress did not eliminate DRCs when the retirement test was eliminated after FRA. This resulted in financial advisors coming up with various ideas to “maximize” benefits. These are options that most low-income beneficiaries cannot afford to consider. In other words, Mary’s “risk-free 8% return” doesn’t come without a cost to the overall health of the Social Security program. I personally would not gloat about using these options!

    by Jean — July 29, 2014

  15. Larry D, assuming you earned more, your wife can receive her own retirement benefit or a benefit based on 50% of your benefit amount, whichever is higher. For example, if your benefit at full retirement age is $2,000 and hers is $1,500, you would each collect your own benefit. If hers was $750, she could collect the $750, plus $250 based on your work, to bring her benefit to $1,0000.

    Elaine, if you don’t have health issues and enjoy your work, then it would be a great idea to continue working and collect your SSA benefit in order to pay off your mortgage and debts. If you have a long life expectancy, then you may want to delay receiving after FRA to accumulate DRCs.

    For anyone, it is misleading to refer to a lump sum/retroactive benefits as a “windfall” as these are benefits you could have received and chose to delay. You cannot receive DRCs for months for which you chose to receive retroactive benefits.

    by Jean — July 29, 2014

  16. I am close to my FRA and am considering “file and suspend” when the time comes. My husband is a federal retiree whose SS payments have been drastically reduced by the Windfall Elimination Provision. If I apply for a spousal benefit and suspend my own benefit, will I get 50% of his reduced benefit or 50% of what he would be entitled to without the WEP? Another question: If SS runs out of money and only pays 75% of benefits as projected in the future, does “file and suspend” still make sense?

    by Brigitte — August 6, 2014

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