Last week’s blog post introduced the “file and suspend” Social Security strategy. By implementing this strategy, a couple with a breadwinner can start a spousal benefit and suspend the breadwinner’s retirement benefits, increasing the latter’s benefits by as much as 32%, depending upon when it’s restarted. “File and suspend” is typically done when the breadwinner has reached full retirement age (“FRA”) and the younger spouse is at least age 62.
As pointed out at the end of last week’s post, the “file and suspend” strategy is a viable solution for maximizing a married couple’s Social Security benefits, however, it’s not without risk. Specifically, a potential downside of using this strategy is (1) premature death of the breadwinner or (2) the couple’s premature death between age 70 and “breakeven.”
Breadwinner’s Premature Death
If the breadwinner dies between FRA, assuming this is when the strategy is implemented, and age 70, the couple will have forfeited receipt of the breadwinner’s Social Security benefits that he/she could have been receiving beginning at FRA through date of death. By doing this, the couple would have to use other resources, e.g., salary, IRA accounts, etc., to meet their financial needs.
Let’s take a look at an example. Per Exhibit 1, assuming a monthly benefit of $2,475 for the breadwinner beginning at age 66 and 2 months and annual 2% increases, there would be a cumulative loss of benefits of $117,462 for the breadwinner assuming death at age 70. This loss of benefits, however, could be offset by an increase in the surviving spouse’s benefit assuming that the breadwinner filed and suspended at age 66 and 2 months. This is due to the fact that a surviving spouse is entitled to receive the larger of his/her benefit or his/her deceased spouse’s benefit.
Per Exhibit 1, at age 70, the breadwinner’s projected annual benefit is $32,148 and the spouse’s benefit is $16,074. Assuming death of the breadwinner at age 70, the surviving spouse would be entitled to receive the larger benefit, or $32,148. Let’s further assume that the breadwinner filed and suspended at age 66 and 2 months with the goal of resuming his/her benefit beginning at age 70, however, he/she dies on his/her 70th birthday. Per Exhibit 2, the breadwinner’s annual benefit is projected to be $42,631 at age 70, or $10,483 greater than what his/her benefit would have been had the breadwinner not filed and suspended. The surviving spouse in this case would be entitled to receive $42,631 instead of $32,148. With an increased benefit of $10,483 plus annual 2% increases, it would take approximately 11 years for the surviving spouse to overcome the cumulative loss of benefits of $117,462 that the breadwinner could have received between age 66 and 2 months and age 70 had he/she not chosen to “file and suspend.”
Couple’s Premature Death Between Age 70 and “Breakeven.”
Let’s assume that our breadwinner and spouse are both healthy and the breadwinner doesn’t die before age 70. Is the use of the “file and suspend” strategy without risk? Absolutely not. Let’s also combine our couple’s cumulative projected Social Security benefits from Exhibit 1 and 2 into one spreadsheet – Exhibit 3. The three columns in orange on the left-hand side represent the cumulative results per Exhibit 1, i.e., breadwinner beginning receipt of benefits at age 66 and 2 months. The three columns in yellow on the right-hand side represent the cumulative results per Exhibit 2, i.e., the breadwinner filing and suspending at age 66 and 2 months with recommencement of benefits beginning at age 70.
Per Exhibit 3, the couple’s cumulative Social Security benefits are projected to be greater from the breadwinner’s age 66 and 2 months through age 79 assuming survival of both individuals. It isn’t until sometime during the breadwinner’s age 80 that “breakeven” occurs when the cumulative benefits using the “file and suspend” strategy are projected to exceed those without use of this strategy. Assuming survival of the breadwinner and spouse, the difference in benefits is projected to become more significant each year thereafter. What starts out as a projected difference of $10,094 ($773,091 – $762,997) at age 80 grows to $77,920 ($1,152,943 – $1,075,023) at age 85 and $152,806 ($1,572,331 – $1,419,525) at age 90.
In summary, while the “file and suspend” strategy can potentially maximize a married couple’s Social Security benefits, its success is dependent upon longevity of the breadwinner and spouse. To the extent that the breadwinner or the couple die prematurely, commencement of receipt of retirement benefits beginning at the breadwinner’s full retirement age (“FRA”) would generally be more beneficial, depending upon assumptions used.
Robert Klein, CPA, PFS, CFP®, RICP®, CLTC® is the founder and president of Retirement Income Center in Newport Beach, California. Bob is also the sole proprietor of Robert Klein, CPA. Bob applies his unique background, experience, expertise, and specialization in tax-sensitive retirement income planning strategies to optimize the longevity of his clients’ after-tax retirement income and assets. He does this as an independent financial advisor using customized holistic planning solutions based on each client’s needs and personality.