The Power of Filing and Suspending

A cynic might say that you know something must be good when the government sets its sights on it. President Obama's budget for 2015 "proposes to eliminate aggressive Social Security claiming strategies, which allow upper-income beneficiaries to manipulate the timing of collection of Social Security benefits in order to maximize delayed retirement credits." One of those strategies is the ability to file and suspend a benefit.

Nixing that strategy isn't likely to happen overnight, so retirees and those soon to retire have little to worry about. And while it's true that the wealthy may have an easier time using that strategy, filing and suspending a benefit is a powerful tool for Social Security beneficiaries of all stripes. Here's what that strategy can do.

Bring in income for a spouse. For married couples, the ability to take a spousal benefit rests on one spouse applying for his own benefit. A spousal benefit is worth up to 50% of the other spouse's benefit. Let's say a husband is eligible for a $2,000 monthly benefit at full retirement age, while his wife qualifies for a benefit on her own of $700 at her full retirement age. If she can take a spousal benefit off his record, at age 66 she could receive $1,000—$300 more than her own benefit. But her husband wants to delay his own benefit to earn delayed retirement credits of 8% a year. That will boost their total income in their later years and provide a higher survivor benefit for his wife if he dies first. But how can he earn those credits if he has to apply for his benefit so she can get a spousal benefit? By filing and suspending.

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At full retirement age, which is 66 for those born between 1943 and 1954, the husband can apply for his benefit, which allows his wife to apply for a $1,000 spousal benefit now. He can then immediately suspend his own benefit, which will grow up until age 70. That extra income from the spousal benefit in the interim can help a couple delay the highest benefit, by reducing the amount of money they will need from other sources.

Provide income for minor children. An older parent may qualify for a Social Security benefit even though he may have children under the age of 18 to provide for. Those dependent children can collect monthly Social Security benefits off their older parent's record if the parent takes his benefits. But, similar to the married couple above, he may want to wait to take his own benefit until age 70 so that he can boost it by up to 32%.

This is where an older parent can make use of the file-and-suspend strategy. At full retirement age, he can file for his benefit. That will allow his dependent minor children to receive monthly benefits worth up to half of his benefit, generally until those kids reach age 18 (up to age 19, if a child is still a full-time student). He can then immediately suspend his benefit, which will allow it to earn 8% a year in delayed retirement credits up to age 70.

And as the caregiver for a minor child under age 16 who is receiving a Social Security benefit, a wife—even one who is younger than Social Security retirement age—may qualify for a benefit worth up to half of the husband's benefit. Note that the total of the children's benefits and the wife's benefit would be subject to a family maximum amount, which can range from 150% to 180% of the husband's full benefit amount. If the total benefits for the wife and kids exceed that maximum, the benefits are proportionately reduced to that maximum amount.

Boost an early claimer's reduced benefit. Those who claim Social Security early take a significant haircut that can last their lifetime. If you take a benefit at age 62, you cut that benefit by 25% for as long as you live. A benefit worth $2,000 a month at full retirement age is reduced to $1,500 if it's taken at age 62.

But here's where file-and-suspend can help. Say that you have gone back to work or just regret that you took that cut to your benefit. Of course, you have already filed, but once you hit full retirement age, you can suspend your benefit. You will stop receiving payments, but your benefit will start earning those 8% a year delayed retirement credits.

After suspending your benefit at full retirement age, you can restart it at age 70. That will add $480 more a month to a reduced benefit of $1,500, for a total of $1,980—only $20 less than a full retirement age benefit of $2,000. Filing and suspending practically erases that early reduction, giving a Social Security beneficiary one of the few mulligans in life.

Furnish “insurance” for delaying benefits. While many people should delay claiming benefits until age 70, for many it is hard to turn down the cash and wait. Singles who don't have access to a benefit from a deceased spouse's or ex-spouse's earnings record may be particularly concerned about delaying since they won't have a way to bring in any extra income from Social Security in the interim. For a beneficiary who wants to try to delay, but wants the option to undo that decision if needed, he—either single or married—can use the file-and-suspend strategy to provide a potential do-over.

Like any beneficiary, by filing at full retirement age and then suspending, he can earn delayed retirement credits of 8% a year until age 70. If a couple of years down the road he suddenly needs the money, he can ask Social Security for a lump sum payout dating back to the day he filed. If he didn't use the file-and-suspend strategy, he could only receive a lump sum worth six months of retroactive benefits. Note that either way, the monthly benefit amount reverts to the amount it would have been at the start date of the lump sum payout.

So, say a person would receive $2,000 a month at 66, but he files and suspends. He delays his benefit until age 68 to earn delayed retirement credits, but then he suddenly needs the money. He can get a lump sum payout worth two years of benefits, or $48,000, and revert his benefit back to $2,000 a month, giving up all the delayed credits. If he hadn't filed and suspended, he could only ask for retroactive benefits going back six months, giving him a monthly benefit of $2,240 and a lump sum payout of $13,440.

Haven't yet filed for Social Security? Create a personalized strategy to maximize your lifetime income from Social Security. Order Kiplinger’s Social Security Solutions today.