There are few free lunches in retirement planning. For married couples, a Social Security claiming strategy known as “file and suspend” may be one of them.
Here’s how it works: A person files for Social Security retirement benefits at full retirement age, but then suspends payment of them. By filing for benefits, that person’s spouse and dependents are eligible for retirement benefits at the time of the filing. And by suspending the benefits, the person can still earn delayed retirement credits that increase the future retirement benefit by 8 percent per year until age 70.
“People are leaving money on the table,” said David Leland, a Merrill Lynch financial advisor in Beverly, Mass. “It’s not as simple as both spouses maxing out their Social Security by waiting to claim them at age 70. Couples may be missing out on benefits for lack of knowing.”
For example, Leland estimates a file-and-suspend strategy for one married couple he advised will generate an additional $50,000 to $60,000 over their lifetimes. Generally, it makes sense for the top earner of the couple to file and immediately suspend his or her retirement benefit, while the other claims a spousal benefit, which would be half of the top earner’s benefit. (The Social Security Administration will not allow both members of a couple to collect a spousal benefit off the other spouse’s suspended benefit.)
Your full retirement age is the lynchpin to file and suspend. You only have the ability to file and suspend benefits once you reach that age, which is 66 years old for those born between 1943 and 1954 and 67 for those born in 1960 or later. Full retirement age rises gradually from 66 to 67 for those born between 1955 and 1959.
Couples should wait until the older spouse turns 60 to figure out exactly what claiming strategy would be best for them, said Alina Lee, director of financial planning at Cassaday & Co. in McLean, Va. That’s because they will have a better sense of what their Social Security retirement benefits will be. Health and work considerations should also factor into Social Security claiming strategies, she said.
Free online resources can help married couples navigate what claiming decision to make. Sites like AARP and SmartAsset provide free Social Security benefits calculators, and online financial advisory firm Financial Engines offers a free Social Security planner. The company said the tool has identified more than $10 billion in additional Social Security benefits for customers in the past year, and the median amount of additional benefits the typical married couple received has been more than $100,000 over their lifetimes.
File and suspend is a relatively new strategy. It was permitted in 2000 by the Senior Citizens’ Freedom to Work Act to give married couples more flexibility in planning their retirements. Shortly thereafter, financial advisors and benefits experts began promoting file and suspend as a way for couples to boost their retirement income.
The financial crisis amplified retirees’ interest in Social Security claiming strategies as their retirement savings declined with the overall market, Leland said.
There are some concerns that the option might disappear. President Barack Obama‘s proposed budget for fiscal 2015 hinted at the possibility, proposing “to eliminate aggressive Social Security claiming strategies, which allow upper-income beneficiaries to manipulate the timing of collection of Social Security benefits in order to maximize delayed retirement credits.”
But the political flack hasn’t diminished interest from clients, Leland and Lee said. And any change to Social Security benefits would have to be approved by Congress and would likely not affect those in or near retirement now.
The key with any Social Security claiming strategy is to think about the ramifications it will have through what may be decades of retirement, Leland said. “Some people spend 15 to 20 minutes on the decision, but it can be the most important one they make,” he said.