Married?

Collecting or thinking about soon collecting Social Security?

Here’s a little known strategy that could really put more dollars in your pocket, courtesy of your uncle and mine, Uncle Sam.

…If you’re married and looking for opportunities to increase retirement income, you may want to look closely at your Social Security benefits. One opportunity for maximizing Social Security income, called “file-and-suspend,” may enable a married couple to boost both their retirement and survivor’s benefits.

What is file-and-suspend?

Generally, a husband or wife is entitled to receive a Social Security retirement benefit based either on his or her own earnings record (a worker’s benefit), or on his or her spouse’s earnings record (a spousal benefit), whichever is higher. But under Social Security rules, a husband or wife who is eligible to file for retirement benefits based on his or her spouse’s record cannot do so until his or her spouse begins receiving benefits. However, there is one exception–someone who has reached full retirement age may choose to file for retirement benefits, then immediately request to have those benefits suspended, so that his or her eligible spouse can file for spousal benefits.

File-and-suspend is a strategy that may be used in a variety of situations, but is commonly used when one spouse has much lower lifetime earnings, and thus will receive a higher retirement benefit based on his or her spouse’s earnings record. (A husband or wife’s spousal benefit may be as much as 50% of what his or her spouse is entitled to receive at full retirement age.) Using this strategy not only allows the eligible spouse with lower earnings to immediately claim a higher (spousal) retirement benefit, but can also increase the amount of available survivor protection. The spouse with higher earnings who has suspended his or her benefits can accrue delayed retirement credits at a rate of 8% per year (the rate for anyone born in 1943 or later) up until age 70. Because a surviving spouse will generally receive a benefit equal to 100% of the retirement benefit the other spouse was receiving (or was entitled to receive) at the time of his or her death, suspending a benefit to accrue delayed retirement credits may substantially increase the survivor’s benefit.

Example

Let’s look at one hypothetical example of how filing for, then suspending, Social Security benefits might help a married couple increase their retirement income and survivor’s benefits.

Henry is about to reach his full retirement age of 66, but he wants to postpone filing for Social Security benefits. At full retirement age his monthly benefit will be $2,000, but if he waits until age 70 to file, his benefit will be $2,640 (32% more) due to delayed retirement credits. However, his wife Julia, who has had substantially lower lifetime earnings than Henry, wants to retire in a few months at her full retirement age (also 66). Based on her own earnings record, Julia will be eligible for a monthly benefit of $700, but based on Henry’s earnings record she will be eligible for a monthly spousal benefit of $1,000 (50% of Henry’s entitlement).

So that Julia can receive the higher spousal benefit as soon as she retires, Henry files an application for benefits, but immediately suspends it. That way, he can also continue to earn delayed retirement credits, which will result in a higher monthly retirement benefit for him later.

Using the file-and-suspend strategy not only increases Julia and Henry’s retirement income, but it also offers increased survivor protection. Upon Henry’s death, Julia will be entitled to receive 100% of what Henry was receiving (or was entitled to receive) at the time of his death. So by suspending his own retirement benefit in order to increase it through delayed retirement credits, Henry has ensured that Julia will receive a survivor’s benefit that is up to 32% higher for the rest of her life should he die first. (Note, though, that this hypothetical example is for illustrative purposes only and does not account for cost-of-living adjustments or taxes.)

Points to consider

• Deciding when to begin receiving Social Security benefits is a complicated decision. You’ll need to consider a number of scenarios, and take into account factors such as both spouses’ ages, estimated benefit entitlements, and life expectancies. A Social Security representative can help explain your options.

• Ask a tax professional to help you weigh the tax consequences of delaying Social Security income.

• Using the file-and-suspend strategy may not be advantageous when one spouse is in poor health or when Social Security income is needed as soon as possible.

• The spousal benefit will be reduced if the spouse claiming it is under full retirement age.

Each year, the Social Security and Medicare trustees issue a report on the financial health of these two programs. The news hasn’t been good. According to this year’s report, in 2016, Social Security will begin paying out more money than it takes in, and will be able to pay promised benefits only until 2037; afterwards, the trust fund reserves will be exhausted and payroll tax income will be enough to finance only 76% of scheduled benefits until 2083.

Social Security reform has been a political hot potato, but that may be about to change. The decline of the financial markets has led to renewed focus on the importance of Social Security income to retirees, and on the need to address the growing burden that Social Security is placing on the federal budget.

You can find the annual trustees report on the Social Security Administration’s website, www.socialsecurity.gov.

Proposals to stabilize Social Security

Despite fears that Social Security will not be around for future generations, there have been no calls to eliminate Social Security, and the focus is on making the program sustainable. In fact, President Obama has repeatedly expressed his commitment to preserving Social Security. To help accomplish this, he favors a Social Security payroll tax on earnings above $250,000 (currently no Social Security payroll tax is assessed on earnings above a certain maximum, $106,800 in 2009). Many other potential solutions have also been suggested. For example, the Social Security Solvency Act of 2009, introduced in the Senate in February, proposes accelerating by five years the gradual increase in full retirement age to 67, and modifying the benefit calculation to reduce benefit growth. This year’s trustees report mentions immediately increasing the payroll tax or reducing benefits as additional options.

The near future

The Congressional Budget Office (CBO) is projecting that for the first time since 1975, when cost-of-living adjustments (COLA) were first payable, Social Security beneficiaries will not receive an automatic increase next year (or for 2011), due to low inflation. According to the CBO, the absence of COLA will also affect the maximum earnings that are taxable for Social Security, because under the Social Security Act, the earnings maximum can only increase when COLA is payable. Therefore, the CBO is projecting that this year’s earnings base of $106,800 will remain the same for the next two years.

Medicare beneficiaries will be affected too. By law, for individuals who have their Medicare Part B premiums withheld from their Social Security checks, premiums cannot rise more than COLA increases for Social Security. Consequently, no annual COLA means that standard Medicare premiums will remain at their current level of $96.40 per month for approximately 75% of Medicare beneficiaries. However, certain beneficiaries (those who do not have their premiums deducted directly from Social Security and those with higher incomes who pay higher income-related premiums) do not have this protection, and will see their premiums rise, perhaps substantially.

Stay informed

Most Americans rely on Social Security for at least a portion of their retirement income, but to ensure that Social Security will be able to pay promised benefits for many years to come, it’s clear that the program must change. It’s a good idea to follow the news to learn about legislative developments and model various income scenarios when developing your own retirement plan.

If your retirement savings have taken a beating, you may be wondering how you will make up a monthly retirement shortfall. One option might be to delay receiving Social Security benefits. Although you can receive retirement benefits as early as age 62, the longer you put off retirement, the larger your monthly benefit check will be.

When can you retire?

How much you’ll receive from Social Security every month depends mainly on how old you are when you begin receiving benefits and on your lifetime earnings. Your full retirement age is 65 to 67, depending on the year you were born. The Social Security Administration calculates your base benefit–the amount you’ll receive at full retirement age–using a formula that takes into account your 35 highest earnings years.

How much you’ll receive from Social Security every month depends mainly on how old you are when you begin receiving benefits and on your lifetime earnings. Your full retirement age is 65 to 67, depending on the year you were born. The Social Security Administration calculates your base benefit–the amount you’ll receive at full retirement age–using a formula that takes into account your 35 highest earnings years.

If you begin receiving benefits earlier, you’ll receive less than you would at full retirement age. If you begin receiving Social Security benefits at age 62, each monthly check you receive will be 25% to 30% less than it would be if you waited until full retirement age.

If you begin receiving benefits later than full retirement age, you’ll receive more than you would receive at full retirement age, because you’ll earn delayed retirement credits for each month you postpone retirement up until age 70. Delayed retirement credits will increase the amount you receive by 7% annually if you were born in 1939 or 1940, 7.5% if you were born in 1941 or 1942, or 8% if you were born in 1943 or later.

Retirement benefit illustration

The following chart illustrates how the age you
begin receiving benefits can greatly affect the
amount of income you receive from Social
Security every month. The chart assumes a full retirement age of 66, and a base benefit at full retirement age of $2,000 (which is nearly the maximum Social Security benefit an individual can receive).

Social Security Retirement Benefit

In this hypothetical example (your individual situation will be different), the Social Security benefit available at age 62 is $1,500, which is 25% less than the $2,000 monthly benefit available at full retirement age. But at age 70, the benefit available is $2,640, which is 32% more than the monthly benefit available at full retirement age, due to delayed retirement credits. Keep in mind, too, that other factors, including post-retirement earnings and cost-of-living increases, can also affect your monthly benefit check.

You can explore various retirement benefit scenarios by using the Retirement Estimator, or one of the other benefit calculators available at the Social Security Administration’s website, www.ssa.gov.

There’s no right or wrong time to begin receiving Social Security retirement benefits, and you should determine how retiring at a certain age affects your overall lifetime income, as well as your monthly income. How long retirement is likely to last, the effect on your spouse’s income, and your tax situation are also considerations when deciding when to retire.