Suspending Social Security Payments: Part 1

Background
There are two times when you might consider stopping your Social Security benefits and then re-establishing them. Both occur after you reach Full Retirement Age (FRA). The first is called Claim and Suspend. The second we will label Withdraw and Reapply.

Both strategies are entirely voluntary. Both are designed to maximize your benefits and assume that you (and/or your spouse) will live a long time. Under Claim and Suspend, you don’t owe the Social Security Administration anything upon suspension. Under Withdraw and Reapply, you must pay back every dollar of benefits you have already received before your re-application will be approved.

In this issue of the Wealth Management Newsletter, we will discuss the Claim and Suspend option; the next issue the Withdraw and Reapply strategy.

Details
Under Claim and Suspend you stop your Social Security payments now in order to increase your monthly benefits later. Claim and Suspend is only available once you reach Full Retirement Age, when you are permitted to work for any salary and collect benefits at the same time. The goal is to allow your withheld payments to earn delayed retirement credits, which provide a higher monthly benefit for you and a greater survivor benefit - if you are married and predecease your spouse.

Of course, the strategy of creating greater lifetime benefits only works if you (and/or your spouse) live long enough to recapture the benefits you gave up. It is designed for those who worry that they might exhaust their assets late in retirement and want to ensure that they (or their surviving spouse) receive the greatest benefit.

Claim and Suspend applies best to individuals or to one-earner couples, where the non-working spouse does not have an employment history that provides a benefit greater than half of the working spouse’s. A spouse with a history of work is often better off taking his/her own benefits.

Here are some examples of how this strategy might apply:

Example 1: Bert is 66 (FRA) and Beth is 62. Beth is desirous of a little extra income and wants to start taking social security. She never worked outside the home and therefore does not have her own benefits to claim. As a result, she will need to take half of her husband’s benefit. Bert is a contractor with a good income. Ideally, he would like to delay taking benefits until he retires in three years in order to get a larger payout. Since Beth cannot take half of Bert’s benefits unless he has started collecting himself, they implement the Claim and Suspend option.

The strategy:
•   Bert claims his Social Security.
•   Beth claims half of his benefits (reduced for starting early).
•   Bert suspends his benefits and receives credit for delaying payments.

Example 2: Louise – age 66 - lost her job during the financial crisis. This year, at full retirement age, she applied and started receiving Social Security benefits. As luck would have it, she landed another job shortly thereafter. Louise would like to stop the Social Security payments, as she no longer needs the extra money and would like to secure a larger benefit for later when she retires. She believes she could live a long time in retirement and is concerned that health care costs could eat into her investments making her more financially vulnerable later in life.

This scenario can work whether Louise is single or married. However, if Louise is married, and has smaller benefits than her husband, she may be better off continuing the payments. She will receive her husband’s larger Social Security payment should he pass away before her.

A Note: The Earnings Test is the equivalent of Claim and Suspend before Full Retirement Age, with the following exceptions. The Earnings Test is mandatory – not voluntary. Once you take Social Security early, under the Earnings Test you cannot opt to stop the benefits and reapply later, as you can under Claim and Suspend.

If you claim Social Security early and if you earn more that $14,160 in 2010, you are penalized $1 dollar for every $2 that you earn above the limit. If it is the year when you reach Full Retirement Age, that limit increases to $37,680 and the penalty is reduced to $1 for every $3 earned above the higher limit. Your benefits are recalculated at full retirement age, giving you credit for the withheld payments. However, this credit is spread over your lifetime in the form of higher monthly payments. It is not the same as foregoing a payment and getting the money back at Full Retirement Age. In addition, before Full Retirement Age, if you want out of Social Security, you must re-pay the Social Security Administration for all the benefits you have received.

In our next issue of the Wealth Management Newsletter we will discuss the strategy or Withdraw and Reapply.

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If you have any questions about Social Security, please give us a call so we can walk you through your options.

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