Dear Liz: You’ve been writing about the “file and suspend” option that allows you to delay taking Social Security while still reserving the ability to get a lump sum if you later change your mind.
If I file and suspend but choose not to take a lump sum before my benefit maxes out at 70, what happens to those funds? What happens to those funds if I die before 70?
Answer: Remember that Social Security is a pay-as-you-go program. The Social Security taxes you pay aren’t piled up in some kind of account, waiting for you to retire. Your taxes pay current retirees’ benefits, just as future workers’ taxes will pay yours.
When you delay starting Social Security, you’re rewarded with a potentially larger check each year you put off claiming until age 70. Your benefit grows by about 7% each year between age 62 and your full retirement age, which is currently 66.
Between full retirement age and 70, your benefit grows at 8% each year in what’s called “delayed retirement credits.”
If you file and suspend at your full retirement age, then change your mind, you can get a lump sum equal to all those checks you passed up since you filed. However, you lose the 8% delayed retirement credits you could have otherwise claimed.
Your benefit is reset to the lower amount you would have received at full retirement age, and that’s the benefit on which all future cost-of-living calculations would be made.
Should you die after filing and suspending, your surviving spouse would be able to benefit from those delayed retirement credits. His survivor’s benefit would be equal to what you could have claimed as of the date of your death.