Ask Liz Weston

Get smart with your money

Retirement

Q&A: Filing and Suspending Social Security

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Dear Liz: I was told by a staff person at our Social Security office that because I am seven years older than my husband (he is 58, I am 65), the “file and suspend” wouldn’t work for me and that because I am waiting until 70 to claim benefits, it was a non-issue.

Is that correct? How does the “lump sum” option figure into the equation? How quickly would I have to file and suspend not to be penalized for the process?

Answer: The “file and suspend” option allows you to file for your Social Security benefit and then immediately suspend that application.

The suspension means your benefit continues to earn delayed retirement credits that boost the amount of your checks 8% each year until age 70, when your benefit reaches its maximum. The file and suspend option is available only once you’ve reached your full retirement age (which is currently 66 but which is rising to 67 for those born in 1960 or later).

There are two main reasons to file and suspend. The first is to allow your spouse to claim spousal benefits based on your work record. The second is to give you the option to change your mind.

If you file and suspend, then discover you need the money, you can either start benefits at the larger amount you’ve earned with delayed retirement credits, or give up those credits and instead receive a lump sum payment of benefits back to the date you suspended your application.

There’s no reason for you to file and suspend for spousal benefits since your husband would have to be 62 before he could file for those checks. By that time, as the Social Security representative points out, you’ll be close to age 70, when you plan to start your benefit anyway.

You could still file and suspend as an insurance strategy — in case you need the money later. If that’s your plan, then doing so at your full retirement age of 66 would give you the option of requesting the largest possible lump sum if you do change your mind.

Decisions about when to start Social Security benefits and how to coordinate benefits when you’re married (or divorced, or widowed) can be extremely complex.

Please read the information the AARP provides on its site about maximizing Social Security benefits and consider using one of the available calculators to explore your options. AARP and T. Rowe Price have free calculators, and you can find more sophisticated options for $40 at sites including MaximizeMySocialSecurity.com and SocialSecurityChoices.com.

Q&A: Delaying Social Security benefits

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Dear Liz: If I retire at 66 but don’t collect my Social Security until 70, will my benefit increase or stay the same since I wouldn’t be working? I can’t find this answer anywhere! Thanks so much.

Answer: Your benefit will increase eight percent each year you put off starting benefits between your full retirement age (currently 66, but rising to 67) and age 70. You get those “delayed retirement credits” whether or not you continue working.

Many people erroneously think the two decisions—when to quit work and when to start Social Security—have to be linked. In fact, they can be entirely separate.

You can retire years before you start Social Security and vice versa. Given the built-in benefit increase for waiting to begin Social Security checks, it often makes sense to tap other retirement money if you can while you wait for your check to max out.

Q&A: “File and suspend” Social Security

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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.

Q&A: Waiting on Social Security

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Dear Liz: I started Social Security at 62 and did the spreadsheet myself showing the break-even point. I would have to be 80 before the graphs even cross.

You, and others, have to stop that business about waiting on Social Security if you can. My own mother lived to 90 and it is about quality of life, not collecting lots from the government.

Answer: Exactly. And since you have longevity in the family, you especially should have paid better attention to the message about the importance of delaying benefits.

If your mother started benefits at 62, or ended up living on a survivor’s benefit from a husband who started early, then her checks were 30% to 50% smaller than they could have been. That difference can be especially crucial in a person’s later years, when she’s far more likely to have outlived her other assets and need the additional money.

Remember that the decision to claim Social Security is separate from the decision to retire. People can retire early and draw from other accounts while putting off Social Security to maximize their checks.

Most people who try to do the math on spreadsheets fail to factor in the effects of inflation and taxes, among other factors.

You can get better calculations from one of the free calculators, such as the ones at AARP and T. Rowe Price. You can find a more robust calculator for about $40 at MaximizeMySocialSecurity.com and SocialSecurityChoices.com.

Another option is to read the recent bestseller published by Simon & Schuster: “Get What’s Yours: The Secrets to Maxing Out Your Social Security.”

Q&A: 401(k) employer limits

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Dear Liz: My company doesn’t allow us to contribute more than 50% of our paycheck to our 401(k). This limits my contribution to far less than the IRS’ $18,000 annual limit because I’m low paid.

How can I tackle this situation, as I would want to contribute more but am being constrained by the 50% contribution cap?

Answer: Your zeal to save for retirement is admirable. Your company may not have anticipated that anyone in your situation would be able to save so much, so consider simply asking if the limit can be raised.

You can explore other avenues as well, such as contributing to an IRA or a Roth IRA. Many people incorrectly believe they can’t contribute to these individual retirement accounts if they have a workplace plan, but that’s not true.

You can contribute up to $5,500 to a Roth (plus a $1,000 catch-up contribution if you’re 50 or older) if your income is below certain limits. The ability to contribute is reduced between modified adjusted gross incomes of $116,000 and $131,000 for single filers and $183,000 and $193,000 for marrieds filing jointly. Alternatively, you can contribute $5,500 (plus the $1,000 catch-up contribution) to an IRA regardless of your income, although your ability to deduct your contribution if you have a workplace plan is phased out for incomes between $61,000 and $71,000 if single and $98,000 to $118,000 for marrieds.

Q&A: “File and suspend”

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Dear Liz: You recently encouraged a reader to listen to his financial advisor, who wanted him to file for his Social Security benefit at his full retirement age of 66 but then suspend the application until his benefit maxes out at age 70.

Another good feature of this “file and suspend” maneuver is the ability to ask for all the unpaid benefits in a single lump sum in the event one develops a terminal illness or needs funds for some other exigent circumstance, such as long-term care. The potential lump sum “back pay” can be a pretty good insurance policy while waiting for age 70.

Answer: Thanks for highlighting this important feature. Many people who are on the fence about delaying Social Security don’t understand that their decision is reversible — as long as they wait until their full retirement age to file.

At that point, they have the option to file and suspend. If they later change their minds, they can request a lump sum for all the benefits back to the date they filed.

They lose any “delayed retirement credits” from waiting — in other words, their benefit is reset to what it would have been had it started at full retirement age — but they get a big chunk of cash when they may need it most.

People who file before their full retirement age, which is currently 66 and rising to 67 for people born in 1960 and later, don’t have the option to file and suspend.