Ask Liz Weston

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Social Security

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.

Q&A: Postponing Social Security

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Dear Liz: My question is on when to take Social Security. My financial advisor recommends that I file for my benefit at age 66 but suspend the application so my benefit can continue to grow until it maxes out at age 70. At 66, I would receive $2,614 per month. At age 70 I would receive $3,451 per month. In those 48 months I would have received $125,472. I calculate that it would take me 12.49 years to make up the difference of $837 a month. So why should I postpone until age 70? What am I missing?

Answer: There’s a big difference between postponing Social Security until your full retirement age of 66 and postponing again until age 70.

Postponing until full retirement age is pretty much a slam-dunk, if you can afford to do so. That’s because most people will live beyond the break-even point, which is typically somewhere between ages 77 and 78.

The break-even point for postponing until age 70 is between age 83 and 84, which is cutting it closer in terms of average life expectancy. A man who reaches age 65 is expected to live on average until age 84. Women reaching 65 are expected to live until 86.

But focusing just on break-even points ignores other, more important factors.

One is that waiting offers an 8% annual return between age 66 and 70. No other investment offers a built-in, guaranteed return that high.

Another has to do with survivors. If your spouse earned less than you, she would end up depending on your check alone should you die first. (Survivors get the larger of their own benefit or their spouse’s, but not both.) The larger the check, the better off she’ll be.

You can think of Social Security as a kind of longevity insurance that protects you against poverty in old age. The longer you or your spouse live, the greater the chance that your assets will be exhausted and that one or both of you will end up depending on Social Security for the greatest part of your income.

Q&A: Social Security spousal benefits

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Dear Liz: I’m 52 and my wife is 57. I recently retired from the military and will have a small retirement from my new job. When should I take Social Security and when should she take hers? Her letter from the Social Security Administration says that based on her work record, she will receive $88 a month. She has spent most of our married life as a homemaker and caregiver to our children.

Answer: Your wife can’t file for spousal benefits until you file for your own benefit, and that can’t happen until you turn 62 in 10 years.

You may not want to file that early, though, since that would force you to take a permanently reduced benefit. You would be settling for about half of what you could get by letting your benefit grow, which also means a much smaller benefit for your wife should she outlive you.

A better strategy may be for each of you to wait to apply at least until you reach your own full retirement ages (66 1/2 for her, 67 for you).

Your wife would get her own small benefit until you turned 67. At that point, you could “file and suspend.” That means you file so she could get her much-larger spousal benefit, but you would immediately suspend your application so your own benefit could continue to grow.

The “file and suspend” strategy is really helpful for maximizing what married couples can get from Social Security, but the maneuver is available only for those who have reached their full retirement age.

Three years later, when your benefit maxes out at age 70, you can end the suspension and start getting your checks.

It’s especially important for higher-earning spouses to avoid locking themselves into permanently reduced checks. If your wife outlives you, she’ll have to get by on a single check — yours — so you want the amount to be as large as it can be.

Thursday’s need-to-know money news

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scamToday’s top story: Last-minute tax filers need to watch out for an Obamacare scam. Also in the news: Paying to check your credit, how to delay taking Social Security, and retirement planning tips for women.

Last-Minute Tax Filers: Beware of This Obamacare Scam
Scammers are taking advantage of Obamacare tax penalties.

Should I Pay To Check My Credit Score?
The pros and cons of free credit reports.

3 Ways to Delay Taking Social Security
A delay could be financially advantageous.

Key Retirement Concerns And 7 Planning Tips For Women
What women need to know to prepare.

Q&A: Social Security and Divorce

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Dear Liz: Can my 63-year-old ex-husband, who was a slacker who never worked, collect on my Social Security? I am 59 and happily remarried. He hasn’t remarried. We were married for 25 years before I left him.

Answer: Since you were married for more than 10 years, your former husband can apply for spousal benefits based on your work record. He can’t do so, however, until you’re old enough to get retirement benefits, which means he has to wait another three years until you’re 62. If you were still married, he would have to wait until you actually applied for your own retirement benefits to get a spousal benefit. That requirement is waived for divorced spouses to keep a vengeful ex from deliberately withholding the right to benefits. His ability to claim spousal benefits on your work record would end if he remarried.
Any spousal checks he gets won’t affect or reduce your benefit or any benefits claimed by your current spouse. Should you die first, both your current and your former husbands could claim survivors’ benefits — again, without affecting each other’s checks

Q&A: Social Security solvency

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Dear Liz: Can you tell us what the status is of the Social Security system? Will the money that I and my employers have paid into the system be there for me when I need it in 15 or 20 years?

Answer: The money you pay into the system provides benefits for current retirees. When you’re retired, other workers will provide the money for your benefits. It isn’t a retirement plan where you contribute money that you later withdraw. It’s an insurance fund to protect you against poverty in old age.

The Social Security system isn’t about to disappear. The depletion of its trust funds is expected in 2033, but that doesn’t mean Social Security will go out of business. The system will continue to receive enough in payroll taxes from current workers to pay 77% of promised benefits. So even if Congress doesn’t get its act together to make necessary and sensible reforms, you’ll still get a check. If Congress does get its act together, the reforms probably will affect younger workers more than those close to retirement.

For more on how Social Security works and its benefits, read “Get What’s Yours: The Secrets to Maxing Out Your Social Security” by Laurence Kotlikoff, Philip Moeller and Paul Solman.