Why the Social Security file-and-suspend strategy isn’t for everyone

A financial adviser called me last week with what seemed to be a simple question: If file and suspend is such a valuable claiming strategy to maximize Social Security benefits, why doesn’t everyone who is at least 66 years old request to file and suspend their benefits by the April 29, 2016, deadline, she asked?

Great question!

There are several reasons that eligible individuals would want to file and suspend their Social Security benefits by April 29 to take advantage of existing rules.

The primary reason is to trigger benefits for a spouse who is old enough to claim Social Security benefits or who will become eligible to collect benefits within the next four years. Another reason is to trigger benefits for a minor dependent child younger than 18 (or 19 if still in high school) or a disabled adult child. And finally, if you want to reserve the right to request a lump sum payout of all of your suspended benefits instead of collecting a delayed retirement bonus.

When you file for Social Security benefits at full retirement age or older and immediately request to suspend your benefits, you do not receive any payments. But your benefits continue to grow by 8% per year up to age 70. At that point, you could begin collecting your monthly benefits worth up to 32% more than your full retirement age amount.

In the meantime, your action triggers a benefit for your eligible spouse or child. A spouse must be at least 62 years old to collect a spousal benefit on your earnings record. If she collects at the earliest age of 62, her benefit would be worth 35% of your full retirement age amount if that were larger than her own Social Security benefit. If she waits until her full retirement age of 66 to collect a spousal benefit, she would receive 50% of your full retirement age amount if that is larger than her own benefit.

A child’s dependent benefit is worth 50% of your full retirement age amount. And a spouse of any age who is caring for your child who is under age 16 or disabled is also entitled to a benefit worth 50% of your full retirement age amount. But the total amount a family can receive on a worker’s benefits is limited, ranging from 150% to 180% of the worker’s benefit. If total benefits exceed those levels, they are reduced proportionately for your spouse and children. The worker’s benefits are not reduced.

But if your spouse waits until she is at least 66 when she first claims Social Security, she can exercise another valuable claiming strategy. By waiting until her full retirement age, she can file a restricted claim and receive only spousal benefits for up to four years while her own benefit continues to grow by 8% per year up until age 70, when she can switch to her own maximum benefit.

That is the main reason that someone who is eligible to file and suspend under existing rules may not want to exercise this claiming strategy. Everyone is entitled to just one claiming decision. So if you choose to file and suspend your benefits by the April 29 deadline, you can’t also claim only spousal benefits on your mate’s earnings record.

Anyone who was 62 or older by the end of 2015 (including those who celebrated their 62nd birthday on Jan. 1, 2016) retains the right to claim only spousal benefits when they turn 66. They do not need to do anything in between. The ability to claim only spousal benefits at age 66 or later applies to both married spouses and ex-spouses who were married at least 10 years, divorced and are currently single.

For married couples, the only way you can claim spousal benefits is if your husband or wife is actually collecting Social Security benefits or if he or she filed and suspended their benefits by the April 29 deadline. Only one spouse can collect spousal benefits.

A different rule applies to eligible divorced spouses. In addition to being married at least 10 years, if you have been divorced at least two years and both you and your ex-spouse are at least 62 years old, you can collect spousal benefits even if your former spouse has not yet begun collecting benefits. Divorced spouses are independently eligible to collect spousal benefits on one another’s earning record.

So to recap, even if you are 66 or older by the April 29 deadline, do not request to file and suspend your Social Security benefits if what you really want to do is to claim spousal benefits for up to four years while your own benefits continue to grow up until age 70.

But if you want to trigger benefits for a spouse or minor child, or you want to reserve the right to request a lump sum payout of suspended benefits anytime up to age 70, don’t delay. You must submit a request to file and suspend your benefits no later than April 29, 2016.

(Questions about new Social Security rules? Find the answers in my new ebook.)

Mary Beth Franklin is a certified financial planner.

Related Topics: Social Security Rules