Restricted application. Full retirement age. File-and-suspend. Spousal benefits.
If you’re aware of these terms, you’re probably entering your early 60s and are doing your financial planning for retirement.
They refer to Social Security, and more specifically, when to begin taking your benefit. Social Security benefits can be a significant source of income for many retirees, providing more than $1 million of cash flow during a couple’s joint lifetime. So if there are strategies available to increase this stream of income by tens of thousands of dollars (or even in excess of $100,000) over your lifetime, you should speak with your financial advisor to see what strategy may be most appropriate for your specific situation.
The good news is there are various strategies available to help maximize lifetime benefits. The bad news—as is the case with most financial planning, tax planning and estate planning strategies—is that you will not know if you chose the right strategy until you die (or at least 15 to 20 years down the road).
When Should You Take Your Benefit?
You can begin taking your full Social Security retirement benefit at your full retirement age (FRA), which is age 66 for those born between 1943 and 1954. Alternatively, you can start your benefit as early as age 62, but your monthly benefit will be reduced by 25 percent. Furthermore, if you decide to take your benefit prior to your FRA, you will be subject to an earnings test based on your level of earned income. The general rule of thumb is that if you are still generating earned income prior to reaching your FRA, it is usually worth deferring your benefit until you stop working, or until age 70 at the latest.
When you decide to take your benefit, you can have it based on your earnings history or your spouse’s (including a deceased spouse or an ex-spouse, assuming that you are not remarried) earning history. After taking into account many factors such as your current asset base, expenses and other sources of cash flow, the goal is to maximize the cumulative benefit of your and your spouse’s benefits over your joint life expectancy.
The Social Security Administration does a pretty good job of determining the reduction factor if you take your benefit before your FRA. Therefore, if you die in your late 70s or early 80s, it does not make a substantial difference if you waited until your FRA to begin your full benefit or if you took a reduced benefit prior to your FRA. However, if you live past your early 80s, you will most likely have been better off deferring the start of your benefit until age 70.
File-and-Suspend and Restricted Application Strategies
One of the most common strategies to maximize your lifetime benefits involves the use of a restricted application. When you are eligible for both a benefit based on your earnings history and your spouse’s earning history, a restricted application can be filed for spousal benefits only, meaning your own benefit will continue to accrue delayed retirement credits.
Another strategy that is sometimes used along with a restricted application strategy is the file-and-suspend strategy, which allows you to file an application for retirement benefits but immediately suspend payments before you even receive your first payment. This makes your spouse eligible to file for and receive spousal benefits based on your earnings history. Since you suspended your own payments, your benefit accrues delayed retirement credits until you reinstate your payments.
You shouldn’t rely on a Social Security Administration representative to guide you through these strategies or create an optimal strategy for you, as these agents’ role is to simply assist you in enrolling in the program. If you would like to speak with a Wescott Financial Advisory Group advisor who can provide you with a strategy that maximizes your cumulative lifetime benefits, please contact us.