Mary Beth Franklin

Retirement 2.0blog

Mary Beth Franklin on what your clients really want when they talk about retirement.

How to hedge bets when claiming Social Security

Filing and suspending allows your client to change his or her mind later

Dec 2, 2013 @ 2:27 pm

By Mary Beth Franklin

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I often suggest that married couples take advantage of a “file and suspend” claiming strategy that allows the main breadwinner to trigger Social Security benefits for his spouse while suspending his own benefits until they are worth more.

As most of my readers know, you must wait until your full retirement age —currently 66 — to file and suspend your benefits. During the suspension period, the worker accrues delayed retirement credits worth 8% per year up to 70.

It's a great way for married couples to collect some Social Security benefits now and ensure that the higher earner collects an even larger benefit later. In many cases, that larger retirement benefit will also translate into a bigger survivor benefit for the wife, if the husband dies first. Survivor benefits are worth 100% of the deceased worker's benefit, including any delayed retirement credits.

But thanks to a reader's question, I just learned that the file-and-suspend strategy offers an added benefit: It can serve as an insurance policy if you change your mind and decide not to delay your benefits after all.

Jim Schomburg e-mailed me recently with a question asking whether it was possible to claim a lump sum Social Security benefit after filing and suspending. He cited a newspaper column written by Social Security expert Tom Margenau.

I answered that lump sum payments are limited to six months of retroactive benefits. I was wrong.

Although the six-month limit applies in most cases, it does not apply when someone files and suspends, Social Security spokeswoman Kia Anderson explained in an e-mail.

“There is a difference between requesting reinstatement of voluntarily suspended benefits and filing for retroactive retirement benefits,” Ms. Anderson wrote.

Generally, a person who is beyond full retirement age when he or she first claims Social Security benefits may be entitled to up to six months of retroactive benefits paid in a lump sum. Lump sum payments can only be paid for months when the beneficiary was full retirement age or older.

However, if you file and suspend with the intention of collecting a larger benefit later, you can change your mind and collect a lump sum retroactively back to the point of your initial filing — even if that is longer than six months.

In this case, you are not requesting a retroactive payment. You have already filed for benefits and you are asking Social Security to reinstate the retirement benefit that you voluntarily suspended.

“Generally, an individual who has suspended their benefit can request the benefit to be reinstated at any time during the suspension period,” Ms. Anderson wrote. “We will pay any benefits due beginning with the first month of reinstatement.”

Wow! Thanks to an astute reader's question, I learned something new about Social Security claiming strategies.

I think this has enormous implications for clients who change their mind about when to claim benefits or allow them to adjust to a changing financial situation.

Let's say the husband, who was entitled to $2,400 per month at 66, decided to file and suspend so his wife could collect a spousal benefit of $1,200, assuming she was also full retirement age. Then, two years later, the couple decides they don't want to wait that long for him to collect his Social Security benefits.

He has two choices. Now that he is 68, he can collect his larger benefit worth about $2,784 per month, including two years' worth of delayed retirement credits. Or, he could request 24 months of retroactive benefits worth $57,600 (24 x $2,400 ) paid in a lump sum.

From that point, he would collect his basic full retirement age benefit of $2,400 per month rather than a larger benefit that includes delayed retirement credits.

So, please excuse me if I have steered you wrong in the past on this nuanced difference between requesting a lump sum payment of retroactive Social Security benefits and unsuspending a decision to file and suspend.

I learned something new and now, so have you. It would seem that many of your clients may want to file and suspend at full retirement age to protect them in case they change their mind later.

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