The file and suspend is a great strategy for a married couples looking to maximize their Social Security benefits. It can be especially helpful for couples in which one spouse may have stayed home to raise a family or is entitled to little or no Social Security on their own work record.
Here’s how file and suspend works: Upon reaching full retirement age (FRA), the primary worker files for Social Security benefits. This triggers the spouse’s ability to begin receiving spousal benefits, which are available to spouses age 62 and up, and at the spouse’s full retirement age are equal to one-half of the primary worker’s full retirement amount. The primary worker, however, does not begin receiving benefits. Instead, he or she suspends receipt of those benefits until a later date (usually age 70) in order to earn delayed retirement credits (DRCs).
Why are DRCs important? Simply put, they increase the amount of FRA benefit by 8% for each year, up until age 70. This is simple interest, not compound. For example, assuming an age 66 FRA, a person who qualifies for a benefit of $2,000 a month would get 32% more at age 70 – a monthly benefit of $2,640. That’s $640 more per month, every month for life. In addition to DRCs, he or she would also get the annual cost of living adjustment, provided there is one.
Another reason to file and suspend that is not commonly known is because Social Security offers a placeholder in case recipients change their mind later. Typically, Social Security will only pay six months of retroactive benefits to recipients once they have reached their full FRA. But with file and suspend, recipients can request retroactive benefits back to the date they filed and suspended.
For example, let’s say an individual files and suspends at the FRA of 66. Then, at age 69 he receives an adverse diagnosis, encounters an unexpected large expense, or simply changes his mind, he can contact Social Security and request a lump-sum payment of all benefits he has forgone since he filed and suspended. Social Security will pay those benefits in a lump sum and begin monthly payments to him amounting to what he would be entitled to had he been collecting since his original filing date. In this case, he would lose any accumulated DRCs.
File and suspend is just one approach to maximizing retirement income. To learn more about other strategies for retirement income, contact your financial advisor today and consult your legal and tax advisors.
Thomas Singletary, CFP® is a Vice President/Investments with Stifel, Nicolaus & Company, Incorporated, member SIPC and New York Stock Exchange. He can be reached by calling the firm’s Houston office at (281) 655-4000 or toll-free at (866) 457-1534.