Wednesday, October 22, 2014 |
Joe Alfonso, GoLocalPDX Contributor
Many of us have heard about the “file and suspend” strategy used to maximize Social Security benefits for married couples. In this strategy, at full retirement age (FRA) (age 66 if born during 1943-1954) the higher earning spouse files for his retirement benefit in order to qualify his wife for a spousal benefit. (The rules for married couples require one spouse to file for their benefit in order to qualify the other spouse for a spousal benefit.)
The high earner then immediately “suspends” his benefit so that he can earn delayed credits at 8% per year until age 70. At 70, he starts taking his benefit, which is now 32% larger than it would have been had he started taking it at age 66. His wife, assuming she too was 66, would collect a full spousal benefit (half of the FRA benefit of her spouse) while her husband delays his own, providing income in the interim. If she was also eligible for her own retirement benefit, like her husband, she would earn delayed credits until age 70 and would then switch to her own benefit, assuming it had grown to be larger than the spousal benefit.
This strategy, allowed under the Social Security rules since 2000, achieves the objective of allowing the lower earning spouse to collect a spousal benefit as soon as possible without forcing the higher earning spouse to start collecting his own benefit before it can be maximized. This results in additional income during the joint lifetime of the spouses and a maximized survivor benefit for the ultimate survivor of the marriage.
Couples whose ages are more than four years apart and single people often assume that file and suspend is not a viable strategy for them. For these couples, there is no need for one spouse to suspend in order to qualify the other for a full spousal benefit because the older spouse will already be age 70 and collecting a benefit by the time the younger spouse turns age 66.
In the case of someone who has never married (or was divorced before the marriage lasted 10 years) there is no spouse and therefore by definition no one to qualify for a spousal benefit.
In both of the above cases, if the goal is to maximize your retirement benefit by delaying to age 70, the assumption is that you will just delay applying since suspending does not generate additional income in the interim.
While it is true that suspension in these cases cannot be used as a strategy to maximize income, it often still makes sense to suspend anyway, though for a very different reason.
If you just delay applying for your benefit but later have to start it before reaching age 70 due to some unforeseen income need, Social Security will only go back and pay the preceding six months of missed benefits. In contrast, if you voluntarily suspend benefits and later decide you want to start them, you can have ALL of your suspended benefits paid back to you in a lump sum. This divergent treatment is the result of how the SSA applies its rules for paying retroactive benefits versus reinstating voluntarily suspended benefits.
As an example, let’s assume your full retirement age is 66. In the “just delay applying” scenario, if a medical emergency arises when you are age 68 and you need to generate as much additional income as possible, Social Security will only go back to your age 67 ½ to reimburse you for forgone benefits.
In contrast, if you had been suspending benefits, you would be entitled to a lump sum reimbursement for all of the two years of suspended benefits. This “safety valve” aspect of benefit suspension is enough reason for most beneficiaries, married or single, who plan to delay taking a benefit until age 70, to suspend and not just forgo applying.
Of course, once you restart benefits you stop earning delayed credits. Also, any retroactive payments result in lost delayed credits previously earned. Presumably, though, losing these credits would be a lesser concern than the need for additional income under emergency circumstances. Beneficiaries can also opt to forgo reimbursement of suspended benefits and retain delayed credits earned to that point.
One minor issue to keep in mind is that filing and suspending automatically enrolls the beneficiary in Medicare Part A. This in and of itself is typically not an issue since Part A coverage is premium-free. However, if a beneficiary is participating in an HSA health plan, Medicare enrollment renders him or her unable to continue contributing to that plan, though funds contributed to date will not be forfeited.
The ability to “unsuspend” benefits at any time should provide beneficiaries considering delaying until age 70 with important peace of mind. The suspension safety valve effectively makes the decision to delay risk-free, even if unexpected circumstances later arise requiring access to the suspended income.
Of course, each case is unique and the subtleties around Social Security planning are such that you should carefully consider your personal situation in light of the claiming options available to you.
A version of this article originally appeared in the Business Section of GoLocalPDX