Delay Social Security? An Easy Way to Decide
One of the most heatedly debated questions regarding Social Security (SS) is when to start. You have the option of initiating benefits as early as age 62 or as late as age 70. The longer you wait, the greater the monthly payment you will receive over your lifetime. If you are married, there are various strategies you can follow to maximize your combined lifetime SS income depending on the difference between your ages and your salaries. But if you’re single, the only choice you really have is the age at which you begin collecting benefits. I generally recommend always waiting until age 70 unless you need the money sooner or you have a terminal illness or other reason to expect a short remaining lifespan. (See Is It Better to Take Social Security Early?) However, many individuals choose to base this very important decision on longevity expectations. The breakeven point depends on your full retirement age (FRA), but is generally around age 81. That is, if you expect to die before that age, you would get more from SS if you start your benefits earlier rather than later. But if you try to make the “when to start” decision on that basis, how do you know when you’re going to pass away? It turns out there’s an obscure SS rule that eliminates the need to guess. It allows you to delay your benefits until age 70 but change your mind and completely undo that decision at any time!
Here’s the way it works. Let’s suppose that your FRA is age 66 and when you reach that age you are not yet dependent on SS income for your living expenses. The first step is to file for your SS benefits (i.e. start them) but then immediately suspend them (known as “file & suspend”). (You will need to do this in person at your local SS office to make sure it is done correctly). Then simply relax in the knowledge that your future SS benefits are increasing by 8% each year (in addition to any cost of living increases). If nothing happens to you by the time you reach age 70, your benefits will automatically be activated and your monthly SS payment will have been maximized for the rest of your life.
However, suppose instead that you discover at age 68 that you’ve contracted a rare disease with a life expectancy of only five years. There’s no point in delaying your SS benefits any more, since you know you will not live long enough to benefit from the higher monthly payment you’d get by waiting until age 70. But you regret that you didn’t decide to start your benefits earlier. No problem! You simply go back to your SS office and request a “reinstatement of benefits that were voluntarily suspended.” The SSA allows any individual who requested suspension to have his/her benefits reinstated effective for any month during the suspension period. So in this example, you request that the SSA undo the suspension and reinstate your benefits going all the way back to age 66. Your monthly payment moving forward will be less than what it would have been had you waited until age 70. But you’ll get a check for all the benefits accumulated over the previous two years, and you will ultimately end up collecting more money in total from the SSA before you die than if you had waited until age 70.
Surprisingly, the biggest problem with this approach is that few SS employees are trained on it. Most will tell you that it’s not possible or that it’s limited to only six months’ worth of benefits. That’s because it’s easy to confuse this rule with a different one where you can undo a delay by requesting retroactive benefits. You may have to ask to talk to a manager or someone with more knowledge of the rules, or have your financial planner go with you.
Note that you cannot file & suspend prior to your FRA, so this strategy will not help you recover any income you could have gotten had you started SS at the minimum age of 62. Keep in mind also that this strategy is most effective for single people who have never been married. Married couples or divorced or widowed individuals have a much more robust (not to mention complex) set of choices available to them for SS income maximization. Nonetheless, the file & suspend option does give individuals a multi-year period to change their minds about their SS decision. And it starts with the assumption that you will live a long life. That’s a pretty good way to plan for your future!
Here are some additional details on file & suspend from the SS Administration: http://www.ssa.gov/retire2/suspend.htm