There is a lesser-known strategy that can increase Social Security benefits by up to 24% for those who may have applied too early. This approach can significantly impact the monthly amount received after retirement, especially for those who did not wait until the recommended age limit.
When Social Security beneficiaries first apply for their benefits, a base amount is set. Those who choose to delay their retirement benefits until the age of 70 can see a 76% increase in their payments compared to if they had applied at 62, the minimum eligibility age. Once claimed, benefits are generally considered a fixed income, only increasing with the annual cost of living adjustment COLA, which applies uniformly to all beneficiaries.
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The impact of delaying retirement for social security payments
However, individuals who have applied for their benefits prematurely have an interesting option upon reaching full retirement age, which is between 66 and 67 years old, depending on the beneficiary’s birth date. These individuals can choose to suspend their Social Security benefits.
For each month the benefits remain suspended until age 70, the beneficiary accumulates delayed retirement credits, which can result in an increase of up to 8% annually, totaling up to 24% if the suspension is maintained for three years.
Despite its potential benefits, this method is not widely used. The Social Security Administration (SSA) has admitted it lacks concrete data on how many beneficiaries choose this tactic. According to Leanna Devinney, a certified financial planner with Fidelity, it is rare for her clients to employ the “file and suspend” strategy upon reaching full retirement age.
It is also important to note that Congress has restricted other related tactics, such as the “file and withdraw” strategy, which allowed individuals to stop their benefits within the first year of claiming and repay all amounts received to later apply for higher benefits. This option is rarely used due to the financial burden of repaying all received benefits.
Additional advantages of the strategy
Suspending Social Security benefits until age 70 does not provide larger checks than simply waiting to make the initial claim until that age. However, this tactic can be advantageous for those who, over time, gain a better understanding of their cash flow during retirement. Some people may apply prematurely due to a perceived financial insecurity, only to discover later that they have sufficient income from other sources to cover their expenses.
Over time, retirees develop a better sense of their own longevity, and the longer a person lives in good health, the higher the likelihood they will continue to enjoy good health. Recent research indicates that the life expectancy at birth for an American man is 73 years, but this statistic includes early deaths and is not as relevant for retirees. A 65-year-old man, non-smoker, and in excellent health, can expect to live until 88 years old, and a woman in similar circumstances until 90 years old.
Benefits for the surviving spouse
The “file and suspend” strategy can also benefit the surviving spouse. The longer the higher earner delays claiming their benefits until age 70, the larger the benefit their spouse will receive if they pass away first. Survivor benefits allow the surviving spouse to receive 100% of the deceased spouse’s benefit once they reach full retirement age.
Applying for benefits at age 70 offers the highest monthly payments, but the decision of when to start receiving Social Security does not have to be absolute. Each additional month of delay in applying, whether through total delay or suspension after an early application, increases the future benefit. This flexibility allows retirees to adapt their financial decisions to their personal circumstances and changing economic needs.
In conclusion, the strategy of suspending Social Security benefits offers a valuable option for increasing retirement income for those who may have claimed their benefits too early. By understanding and utilizing this method, retirees can better manage their financial security and ensure a more comfortable retirement.