Choosing when to start taking Social Security is a key financial decision. The choice you make can have an impact not just on your own financial situation but also on what your loved ones receive from Social Security, both during your lifetime and after you've passed away.
It used to be that suspending your Social Security benefits allowed you to take advantage of a valuable strategy that could boost the total payments you and your family could receive. Law changes have made that strategy largely unavailable, but there are still a couple of situations in which suspending your benefits can make sense. We'll look at those after giving a brief description of what you used to be able to do by suspending your benefits.
Why the file-and-suspend strategy is gone for good
The strategy that used to use suspending your benefits as a crucial component was valuable for married couples looking to maximize what they could get from Social Security. Appropriately called file and suspend, the strategy involved having you file for retirement benefits but then immediately suspend them. Under the law at the time, doing so would allow your spouse or other family members to claim any benefits they were entitled to receive under your work record, but you get a boost in your monthly payments by earning delayed retirement credits because you had suspended your payments.
Lawmakers eliminated the file-and-suspend strategy in 2016 by no longer allowing family members to claim spousal or children's benefits if you suspended your own retirement benefit. That took away the advantages of filing and suspending. However, you're still allowed to suspend benefits if you want, and here's when it might be smart to do so.
1. You changed your mind and want larger monthly payments in the future
Social Security gives you only a limited ability to change your mind. Once you claim your benefits, you have only 12 months to withdraw your application for Social Security. After that, the only move you can make is to suspend benefits.
If you suspend your Social Security benefits after you reach full retirement age, then you can earn delayed retirement credits. That can be useful if you claimed early and had your payment reduced but now want to get a bigger payout.
For instance, say your full retirement age is 66 and you claimed benefits at 62. Filing early caused a monthly payment reduction of 25% compared with what you would have gotten if you'd waited until age 66 to file. But if you suspend your benefits at age 66, you can qualify for an 8% boost to your monthly payment for each year you wait. The 8% is calculated based on that reduced payout, but if you suspend until age 70, you can get almost back to what you would have earned if you'd waited until full retirement age in the first place.
An example can make this clearer. Say your full retirement benefit would have been $1,400 per month, but filing early reduced it to $1,050. Suspending for four years will boost that $1,050 by 32%, or $336 per month. When you start taking payments again at age 70, you'll get $1,386, adjusted for whatever's happened with inflation in the interim. That's almost back to the original $1,400 amount.
2. You expect to have a high-income year and don't want your benefits to get taxed
Another situation in which it can make sense to suspend your benefits is if your income from other sources rises unexpectedly, leaving you in a position in which a portion of your Social Security could be subject to income tax. If the sum of your outside income plus half your Social Security is greater than $25,000 for singles or $32,000 for joint filers, then you could end up having to include part of your Social Security benefits as taxable income for the year. Retirees can see fluctuations in income either from part-time work or from the taxable distributions they take from retirement accounts like 401(k)s or IRAs.
Suspending benefits is only available after full retirement age, so a high-income year before that will leave you with no good alternatives. After that, though, it's worth considering if your tax planning indicates that you're likely to have higher than normal taxable income.
Be smart about Social Security
Rule changes have made it harder to take maximum advantage of Social Security, but you do still have some options that can help you in the long run. Even though you can't get the advantages of the file-and-suspend strategy anymore, suspending your Social Security benefits still makes sense in some cases.