Even for those who plan to delay collecting Social Security retirement benefits until 70, when they are worth the maximum amount, in some cases, it may make sense to file and suspend benefits at full retirement age as an insurance policy.
Once individuals file and suspend, they can reserve the right to change their mind and collect a lump sum amount retroactively back to the point of the initial filing date.
As most of my readers know, individuals must wait until the full retirement age of 66 to file and suspend benefits, which means that they file for Social Security retirement benefits but defer collecting them until later. During the suspension period, the worker accrues delayed retirement credits worth 8% per year up to 70.
Normally, I recommend the file-and-suspend strategy for married couples to trigger spousal benefits for the lower-earning spouse, providing that he or she is at least 62.
It is 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 benefit for the surviving spouse. Survivor benefits are worth 100% of the deceased worker's benefit, including any delayed retirement credits.
But thanks to a reader's question last month, I learned that the file-and-suspend strategy offers an added benefit that can help single individuals, too. It can serve as an insurance policy if an individual decides not to delay benefits after all.
“Generally, individuals who suspend their benefit can request the benefit to be reinstated at any time during the suspension period,” Social Security spokeswoman Kia Anderson confirmed in an e-mail. “We will pay any benefits due, beginning with the first month of reinstatement.”
Since I first posted “How to hedge bets when claiming Social Security” on Dec. 2, explaining the expanded use of this strategy, the questions and comments have been pouring in.
“Let's say at 66, I decided to file and suspend and then at 68 I find out I had a terminal illness and was only expected to live a few more months,” Sabine Nooteboom, a planning assistant with Young Wealth Management, wrote to me in a recent e-mail. “Could I reactivate benefits at my full retirement age level and ask Social Security to send me a lump sum for the benefits not collected during the past two years?”
Yes, by filing and suspending, an individual reserves the right to collect a lump sum benefit back to the original suspension date.
Let's say a person is entitled to collect $2,000 per month in retirement benefits at the full retirement age of 66. He or she could file and suspend with the intention of collecting benefits at 70 when they would be worth 32% more — $2,640 per month — thanks to four years' worth of delayed retirement credits.
But using the reader's hypothetical example, an individual could change his or her mind at 68 and collect a lump sum of $48,000 ($2,000 x 24 months). After that, that person would receive monthly benefits of $2,000 per month based on the full retirement age benefit rather than a higher amount that would have included any delayed retirement credits.
But the file-and-suspend strategy isn't right in every situation.
“Based upon your column, I was about to file and suspend now with the option of possibly switching to a spousal benefit later,” Arthur Dicker, a wealth strategist with Curran Investment Management, wrote in an e-mail. “But I learned that if you file and suspend, you cannot later un-file and claim a smaller spousal benefit while your own continues to grow.”
That is correct. An individual is only entitled to one Social Security claim.
Those who are married and have reached full retirement age can file and suspend in order to trigger spousal benefits for a spouse while their own benefits continue to grow.
Or, if a spouse has already claimed his or her retirement benefits, an individual can file a restricted claim for spousal benefits only. That would allow the person to collect a smaller spousal benefit now while his or her own benefit continues to accrue delayed retirement credits.
But an individual can't do both. He or she has to decide which would result in a better outcome for their situation.
In most cases, holding out for the bigger benefit will provide greater lifetime income. But if a person's health or financial situation takes a nasty turn and longevity is no longer the primary concern, recouping a lump-sum benefit could be a great solution.