Social Security Strategies
This strategy allows a person to reset or “do-over” their social security benefit amount. Sometimes this strategy is called “Start-Stop-Start” because you essentially unretire, stop your benefits, and then start them again.
You start by filing social security’s “Request for Withdrawal of Application” (Form 521). This has to be filed within 12 months of receiving your first benefits. Then you repay all social security benefits received to date to make them whole again. Surprisingly, there’s no further charges for interest or inflation adjustments. Then you reapply at your current age or later and collect higher benefits. This is a one-time event and it is irreversible.
When you reach full retirement age, the Social Security Administration allows you to stop/suspend receiving benefits until some future date. Your benefits will then grow up to 8%/year (2/3 of 1% per month) up to age 70. You can start your benefits again anytime. You can also request that all suspended benefits be paid out as a lump sum. The catch there is that you give up all your earned delayed credits and return to the point you were at when you suspended your benefits. This provision makes it essentially risk free to try to grow your benefits. It should be noted however that if you suspend your benefits, you’ll need to start making Medicare Part B premium payments since there is no longer a check to withhold them from.
If Jane’s full retirement benefit was $1,000/month at age 66 and she began taking social security at age 62, her benefit would be reduced 25% to $750/month. If upon reaching full retirement age she decides to suspend her benefits, she could start collecting $810/month at age 67, $870/month at age 68, $930/month at age 69, or $990/month starting at age 70. For every year she foregoes, she’ll receive an 8% increase. If for some reason she needs income after 2 years, she could go back to receiving $750/month and ask for a lump sum of $18,000 ($750 x 24 months).
Both Reset and Suspend strategies can be used if a person regrets locking in reduced early benefits, or their situation has changed where they don’t need the income and would rather receive a higher benefit later on.
File and Suspend for Spousal Benefits
** Due to the passing of the Bipartisan Budget Act of 2015, this strategy was only available until May 1st 2016 for people born on or before May 1, 1950. **
Some married couples can use this strategy to take advantage of spousal benefits while also delaying retirement credits at the same time, but at least one of them has to be of full retirement age.
Once a person is of full retirement age, he can file for benefits and then immediately suspend them until sometime in the future. His spouse can then claim a spousal benefit and receive half of his social security benefit. Meanwhile his benefits grow at 2/3 of 1% for every month he delays up to age 70. This works out to 8%/year. If his spouse is also of full retirement age, it’s possible for her own benefit to grow due to being delayed as well.
Example 1 – Tom is 66, his full retirement age. He is entitled to a benefit of $1,000/month. His wife Jane, 62, has limited work experience. Her benefit at her full retirement age is $300/month. If Jane retired and took her own benefits, she would only get $225 (a 25% reduction for taking benefits early). If Tom filed for his own benefits and then suspended them until a later date, Jane could take spousal benefits and Tom’s benefit could keep growing. Jane, under the spousal benefit, would be entitled to $750/month. This includes her own benefit of $225/month + $525/month (($1,000-$300)*.75). Tom’s benefit could grow to $1,320/month (32% increase) if he delayed until age 70.
Example 2 – John and Mary have each just turned 66, their full retirement age. Mary could collect a benefit of $1,500 if she started her benefit now, but John would only receive $600 due to not paying into the system for a number of years. Mary files for benefits, but suspends them until sometime in the future. John is now able to claim spousal benefits and collect $750/month. Mary’s benefit could grow to $1,980/month (32% increase) if she delayed until age 70. John’s benefit will grow as well since he is not collecting on his own benefit. He could get $792/month (32% increase) at age 70 by switching back to his benefit.
** The limits for this strategy (coming from the Bipartisan Budget Act of 2015) will not apply to anyone who is already 62 or older in 2015. **
A restricted application means that an individual is filing for benefits, but restricting the type of benefits to spousal benefits and not starting their own. This allows the spouse to collect some benefits while growing their own for use later on. Sometimes this is called “free spousal benefits”. It is usually recommended that the couple both be of full retirement age. Taking it beforehand could mean a permanently reduced benefit because you’d have to start your own benefit too.
Jack files for his full retirement age benefit of $2,000 per month at age 66, but his wife Nancy, also 66, wants to delay her benefits until age 70 to maximize her future income. Since she is at her full retirement age too, Nancy applies for spousal benefits based on Jack’s benefits and receives $1,000/month which is 50% of his benefit. Nancy delays filing for her own benefits which are $1,600/month so they can grow at 8%/year. At age 70, Nancy switches from collecting a spousal benefit to her own now larger benefit of $2,112 (32% higher than age 66).
Jack and Nancy take an initial income hit. They could have had $3,600/month of income ($2,000 + $1,600), but instead they opted for $3,000/month of income ($2,000 + $1,000 spousal benefit) in order to increase Nancy’s benefit. The plan pays off because in 4 years, their income grows to $4,112/month ($2,000 + $2,112) – keeping the math simple and not taking into account any cost of living adjustments. This not only increases their household income, but also enables Jack to receive a larger survivor's benefit in the event of Nancy's death.
Restricted Application vs. File and Suspend for Spousal Benefits
With a restricted application, your spouse files and collects social security, and you apply for spousal benefits. Your own benefits continue to grow.
With a file and suspend strategy, your spouse files but suspends collection of their social security, and you apply for spousal benefits. Your spouse’s benefits continue to grow. If you are of full retirement age, your own benefits could grow as well.