File and Suspend: Maximize Social Security With Spousal Benefits
Mark Twain didn’t mince words when he said, “All good things arrive unto them that wait, and don't die in the meantime.” When it comes to Social Security, he couldn’t have been more accurate; longevity is the primary factor in considering when to take Social Security benefits. When you understand the significant role that age plays in the equation, it may cause you and your spouse to think about (or rethink) your retirement plans.
Even if you expect to live into your 80s, Social Security should still be there when you need it. Delaying your application for benefits typically generates the greatest cumulative lifetime income. This opportunity became even more valuable with the 1939 amendment to the original Social Security Act that provides survivor benefits for widow(er)s. It typically means that a large retirement benefit generated from a higher wage earner’s history will be preserved for a surviving husband or wife to continue should the higher wage earning spouse die first. With this change, the advantages of delaying the higher-earning person’s benefit are preserved for both the higher earner and, if applicable, the surviving spouse.
When you consider that the National Center for Health Statistics estimates that life expectancy for men at age 65 is 82, and for women is 85, and that a 65-year-old married couple has a 60 percent chance of at least one spouse living to age 90, you can see why patience is so important when you talk about Social Security. The graph below shows how maximizing benefits can pay off.
Source: Estimates based on data from the Social Security Administration (SSA), shown in today's dollars, for someone born in 1953 with earned income equal to the maximum Social Security wage base. Data showing benefit distributions over time does not reflect the time value of money.
Be aware that there may be investments that generate a rate of return in excess of inflation. If that is the case, accessing your Social Security benefits at an earlier age and investing those funds accordingly may be a viable option. However, in today’s environment of extremely low returns on risk-free investments, finding such an investment may prove difficult.
Assuming you are able to tolerate additional risk with the corresponding expectation of a higher return, maximizing your Social Security benefits may still be a strategy to consider. The additional cash flows from enhanced Social Security benefits may allow your portfolio to take a longer view toward an investment strategy. This means a level of risk that will likely be higher than you are accustomed to.
If we can agree that receiving maximum benefits is a good bet based on typical life spans, then we can go one step further and look at a strategy that utilizes spousal benefits to help you reach your retirement income goals.
What are spousal benefits?
Spousal benefits may be paid to the husband or wife of an individual who is entitled to Social Security retirement benefits based on the worker’s highest 35 years of Social Security taxable wages. This means that one spouse may apply for a benefit equal to 50 percent of the other spouse’s full retirement age (FRA) benefit. But to access benefits based on the employment record of your spouse, the other person must have already filed an application for his or her own retirement benefits. This may seem counter-intuitive, but it’s the foundation of the file and suspend strategy (also known as voluntary suspension or claim and suspend).
How the file and suspend strategy works
The file and suspend strategy, made possible by the Senior Citizens' Freedom to Work Act of 2000, adds a wrinkle to collecting spousal benefits. It works like this:
- An individual whose wages will be the basis for spousal payments applies for his or her own retirement benefits at the FRA of 66.
- That person then immediately suspends benefits without ever receiving a retirement benefit deposit from Social Security.
- By applying, the higher-earning spouse makes it possible for his or her partner to begin receiving spousal benefits, while leaving his or her own retirement benefit unaffected and growing until as late as age 70.
File and suspend works best when the lower-earning spouse has a retirement benefit that is less than one-third of the higher-earning spouse’s.
An example of the file and suspend strategy
Jack has an FRA benefit of $2,642 (the maximum) and his wife, Jane, has a benefit of $800. They are the same age. At his full retirement age of 66, Jack applies for retirement benefits, but then suspends his benefits before receiving any payments. Simply by applying for benefits, Jack allows Jane to begin a $1,321 spousal benefit (which is equal to half of Jack’s retirement benefit) rather than only $800 that Jane would get based on her own work history. Jack’s own retirement benefit continues to grow until it is $3,487 at age 70.
Unlike retirement benefits, which can grow through age 70, spousal benefits only grow until FRA. If Jane chooses the spousal benefit, it will be larger than her own maximized benefit. File and suspend bumps her monthly check from $800 to $1,321 four years ahead of schedule, bringing her an extra $25,008 that would have been lost had she put off receiving spousal payments until Jack began receiving his individual retirement benefit.
Filing and suspending can also be useful if Jane is too impatient for benefits to start at 66. If she begins receiving benefits at age 62 the amount would be based on her own employment record. Her husband is able to file and suspend at his FRA of 66, so she would only access her $800 benefit and this amount would be penalized down 25 percent ($200) to $600 due to her early application. Four years later, Jack may still file and suspend to give Jane access to spousal benefits, although her $200 penalty would continue and $1,321 would only be $1,121.
With both scenarios the suspension of Jack’s benefits also allows Jack the flexibility of a subsequent filing for retroactive benefits going all the way back to the date of the suspension. Jack then has the ability to change his mind and receive a lump sum for all of the benefits he has waited on at any time between his FRA (66) and age 70. The full 48 months of $2,642 deposits would equal $126,816.
Never put off until tomorrow…
Mark Twain burnished his credentials as a procrastinator when he said, “Never put off until tomorrow what you can do the day after tomorrow.” Like his earlier advice, this wisdom may also be applied to the question of when is the best time to begin receiving the Social Security payments to which you and your spouse are entitled.
There are other strategies for maximizing your Social Security benefits. In future articles on this topic, we’ll look at one called “claim now, claim more later” and another that combines that strategy with file and suspend. Depending on the circumstances, benefits may even be available to one or both spouses following a divorce. Always consult an investment advisor and tax professional to assist in analyzing your needs and corresponding risks.