Social Security File and Suspend
Trying to figure out the best way to file for Social Security is a little bit like reading the tax code and figuring out how to file your own tax return. It isn’t impossible, but it can be incredibly time-consuming. What makes Social Security difficult is that there are over 150 different ways for a retiree to file for social security benefits.
Allow me to cut out some of the complexity to highlight one strategy that is often optimal for a married couple with two incomes. In shorthand, the strategy is often referred to as “File and Suspend/Restricted Application.” Here is how it works:
The highest earning spouse files for benefits at full retirement age and immediately suspends benefits. This action opens up the ability for the spouse to file for spousal benefits but allows the benefits of the highest earning spouse to continue to grow.
At full retirement age, the lower-earning spouse files a restricted application for spousal benefits. This action begins spousal benefits, but also allows the benefits of the lower-earning spouse to continue to grow.
Why does this often result in the highest benefit? By filing a restricted application, the lower-earning spouse receives current spousal benefits, but can also receive a higher benefit in the future by delaying his or her own benefit. The spousal benefit becomes ‘extra money’ when compared to each spouse merely filing their individual benefits.
Consider the example of Joe, age 64, and Mary, age 62, who retired in 2014. Joe made more than Mary during their working years, earning around $120,000 per year compared to Mary’s $60,000. Now that they are retired, they are considering how best to file for Social Security. They read on the internet that they should at least wait until full retirement age to file, but want to see if there is a better approach.
Option A: File at full retirement age.
Joe has the option of filing for Social Security at Full Retirement Age, 66 for him. At that time, he will receive $32,253 per year. If Mary waits until Full Retirement Age to file, she will receive $24,338.
Option B: File and Suspend/Restricted Application
Joe waits until Mary reaches Full Retirement Age, files for benefits, and then immediately suspends benefits. Mary files a Restricted Application for only her spousal benefits, receiving $16,943 at age 66. Once Joe reaches 70, he begins taking benefits, which have now grown to $46,993 annually. Once Mary reaches 70 she files for her own benefits, receiving $35,461 annually.
Which approach is better?
If both Joe and Mary live to life expectancy, the File and Suspend/Restricted Application approach results in more than $200,000 additional income in lifetime benefits, making a significant difference in their retirement. As long as Joe lives past 78 they will be much better off. Which is best for you? The answer is ‘it depends’. Everyone is different and factors such as lifetime earnings, life expectancy, and age differential between the two spouses all make a difference. If you are approaching social security age, consider reaching out to an advisor to help you walk through all of the scenarios that are available to you.