Suspending Social Security Benefits

A reader from Maryland would like help with the pros and cons of suspending Social Security benefits to earn delayed retirement credits.

"I read that Social Security has a rule where, if you are collecting retirement benefits and are over Full Retirement Age (FRA), you can suspend your benefits to earn delayed retirement credits. (This is not the old 'file-and-suspend' rule eliminated in 2015.) I'm a little confused about how the rule works and whether you must start taking benefits at FRA or wait until FRA to suspend. My husband will reach FRA at 66 and 10 months, and his FRA benefit is around $3,800.

Here's why we're interested: my husband is considering taking his Social Security benefit for 2-3 years starting at age 65, then suspending at around 67-68 when we sell a second home. We are recently married, so the second home was his primary home, which should qualify for tax-free gains. His early benefits would provide secure income to avoid withdrawing as much from IRAs. It could also reduce our taxes. Then, when we sell the home, we'll have tax-free income to use until he turns 70.

What do you think of this approach? How much of a loss or benefit would we get? We understand it also affects survivor benefits, but I will have roughly the same Social Security benefit and plan to file at 70, so it shouldn't have a huge impact."

You are right. The rule about suspension is that you can suspend your benefit after you reach your Full Retirement Age (FRA), and it doesn't matter if you started your benefit before FRA or not. You absolutely can suspend your retirement benefit and, during suspension, earn delayed retirement credits. That's why some would think about suspending: stop their benefit for some time, earn the delayed retirement credits, and then, when they turn it back on, receive a higher benefit for the rest of their lives.

Many people think this is gone because they heard all the news back in 2015 when Congress eliminated the 'file-and-suspend' strategy. It was a misnomer in that they didn't eliminate the suspension. Instead, they eliminated how things worked when you did suspend.

Back before 2015, if you suspended, it still allowed your auxiliary beneficiaries like your spouse and kids to collect benefits off your record even though you had 'suspended.' So people would do that: unlock the spousal benefit, then immediately suspend their benefit – file and suspend – to earn the delayed retirement credits to age 70. It was a very popular strategy, and that's what they killed.

Today, when you suspend the benefit, all benefits tied to your record are also suspended. Suspension is not dead; what's been dead for nine years is being suspended while others collect on your record.

As for the strategy, I'll key in on a few things you mentioned. You're considering having your husband turn on his benefit to reduce how much has to come from your IRAs. I would look at that extremely carefully before deciding whether this is a good idea.

Many people think, "Oh yeah, taking money out of my IRA is damaging it, so I want to do that as minimally as possible. And, if I have Social Security income, I won't have to take out as much." Unless you have an exceptionally short life expectancy, you may find that the additional benefits you get over your lifetime by delaying Social Security can be very competitive in the tradeoff versus taking the money out of your IRAs.

I don't have all the details, and everyone's circumstances differ. However, I wouldn't just assume that the strategy is automatically a good thing to do. Assess it and determine if that's the best for you.

Let's look at your storyline, where your husband turns his benefit on at 65, suspends it (because now he has an influx of cash from the sale of the second home), and then turns it on again at age 70. It seems to make sense from a cash flow standpoint, but I would first be sure it does in your specific circumstances. Taking money out of your IRAs for a couple of years before you sell that home might make perfect sense. You may not miss the extra growth in your husband's retirement benefit that would occur if he didn't turn the benefit on at 65, thereby forgoing some delayed retirement credits. Remember, though, that by claiming at 65, he's also claiming before he reaches FRA, so he's also dinging his benefit in that way.

So, look at the numbers. We like to look at how much extra you'd get by just waiting on your benefit and compare what it would take for your IRA to generate that same amount of lifetime income. See how the numbers fall out. If you cannot do those calculations, you might want to seek somebody who can crunch the numbers for you.

The key is checking the numbers before assuming this strategy is right for you. I'm not saying it's necessarily wrong; I just want to ensure you're going into it 'eyes wide open.'

That's the story on suspension: you can absolutely suspend once you're past FRA and then earn delayed retirement credits from that time up to age 70.