Jay, a financial adviser from Seattle, wrote to me with questions about Social Security benefits for his two minor children.
Jay wanted to verify information he received during a phone call with the Social Security Administration that he thought might be too good to be true. The adviser, who turns 66 this month, said he has two children, 12 and 14, and a wife who is 51 and does not work outside the home.
“Social Security advised me to start taking benefits when I turn 66 and then immediately suspend them,” he wrote in an e-mail. “My children would get monthly payments until they get out of high school.”
Based on a family history of longevity, Jay said he had planned to wait until age 70 to collect his retirement benefits to take advantage of delayed retirement credits worth 8% per year for each year he postpones collecting beyond full retirement age, up to 70.
“I don't want to take benefits for my children now and mess up the 8% increases,” he wrote.
I assured Jay that he could, in fact, file and suspend at full retirement age in order to trigger benefits for his children, while deferring his own benefits until they are worth the maximum amount at age 70.
I also told him that his wife, regardless of her age, may be entitled to benefits, too, because she is the caregiving parent of a minor child under age 16. And as she does not have a job, she won't have to worry about earnings cap limitations which apply to anyone who collects Social Security benefits before full retirement age.
All three family members could qualify for benefits on Jay's earnings record, but each probably would receive less than the normal 50% of his full retirement age benefits, known as his primary insurance amount, because of the family maximum benefit limit.
Although the family maximum benefit amount varies, it is generally equal to about 150% to 180% of the basic benefit rate. If the sum of the benefits payable to family members is greater than this limit, the benefits are reduced proportionately. The worker's benefit is not affected.
“I was skeptical that I could qualify for this money for my children, but it could be a way to set aside some funds for their college,” he wrote.
Filing and suspending benefits is a great way to trigger benefits for minor children up to 18 (or up to 19 if they are still in high school) while deferring your own retirement benefits.
It's also a good way to trigger retirement benefits for a spouse who is at least 62 years old while deferring your own benefits until they are worth more later.
For married couples, filing and suspending is a great strategy that allows them to collect some benefits now while deferring benefits for the higher earner. That not only locks in the maximum retirement benefit during the primary wage earner's lifetime, but the maximum survivor benefit for the remaining spouse.
But I only recently discovered a third reason why the file-and-suspend strategy is so valuable.
It can be used by single individuals, too, as well as anyone who is worried they might change their mind about deferring benefits. Once you file and suspend, you have the option at any time of requesting a lump sum payout of benefits back to the date of your suspension.
So in addition to triggering benefits for spouses or minor children, the file and suspend strategy acts as insurance if you suddenly receive a bad medical prognosis or find yourself in a financial bind when longevity is no longer an issue and a lump-sum payout would come in handy.
But of course, if you grab the money in a lump sum, you forfeit the right to delayed retirement credits. Going forward, you would be paid monthly benefits based on the age you were when you suspended your benefits.