Social Security 5: File and Suspend for Soon-to-Be Widowed Homemakers
(2009-03-30) by avid John Marotta and Matthew Illian
Our own death or the death of a loved one can be difficult to face. But mortality is one of the most critical factors to consider when making decisions about your Social Security. If you have little earnings of your own and your spouse is in failing health, there is a unique way to maximize benefits.
Don’t dismiss this scenario out of hand. It is much more common than you might think. For example, David’s grandfather died at age 72 and his grandmother lived until she was six months shy of 100. Men on average are slightly older than their spouses with significantly higher incomes. And we know they tend to die at a much younger age than their wives. When that happens, the difference between the best and worst Social Security choices can be worth over $90,000.
Healthy spouses with little earnings of their own should always encourage their partners to delay filing for Social Security. What changes in this special case is what they should do concerning their own filing.
Take the case of James and Betty Butterworth. James is four years older than his wife. Betty worked to help put James through law school, and then he started his own estate planning firm. She raised their five children and served on the boards of three local charities. Despite her lifetime of achievements, Betty is not eligible for Social Security benefits because to qualify requires earnings in at least 40 quarters.
James has just turned 66 and Betty is 62. Their plan was to file for Social Security when James turned 70, which would increase their annual income by more than 46% compared to filing when James is 66 (full retirement age). When James is 70, Betty will start receiving half of her husband’s benefits until her husband dies, and then she will inherit his full payment as the survivor. Normally this is the best option, but then the Butterworths’ circumstances take an unfortunate turn.
Betty is healthy, but James has just been diagnosed with cancer and probably will only live another five years. Assuming her husband dies in five years at age 71, Betty will begin receiving his full survivor benefit earlier than is typical for a spouse. In this situation, Betty only expects to receive one year of spousal benefits before jumping up to the survivor benefit. This would mean she would receive just a year of half spousal benefits (when she is age 66 and James is 70) before getting full benefits.
But there is a way for Betty to start receiving spousal benefits at age 62 and still inherit all of the increased benefits from her husband’s delayed filing.
The Senior Citizens’ Freedom to Work Act of 2000 provides an option that can boost total benefits payments for the Butterworths by as much as 10% over the second best choice. This new option is called “File and Suspend.” It works this way: When James reaches his full retirement age of 66, he files for Social Security but suspends receiving any benefits.
Now that James has filed, Betty is entitled to apply for spousal benefits when she is 62. She will collect an extra four years of spousal benefits by using this strategy.
By suspending, James continues to earn delayed retirement credits of 8% a year. These delayed retirement credits allow his benefits to grow from 100% of full benefits when he is 66 to 132% of full benefits when he turns 70. And Betty will inherit this amount after he dies.
Betty is not able to step up to a higher benefit when her spouse files at age 70 because she is already receiving spousal benefits. But she will soon inherit a large survivor benefit, and those early years of spousal benefits really add up. James would have to live to at least 75 before Betty would have benefited from delaying her own filing.
Sadly, James loses his battle with cancer a year earlier than expected. He dies at age 70 and Betty inherits his stepped-up survivor benefit. But because they used the file and suspend option, Betty receives an additional $37,582. If she had waited until James turned 70 to file, she would not have received any spousal benefit.
In summary, the primary earner should often delay taking Social Security when the spouse’s income has been significantly smaller in order to increase the survivor’s benefits. And if the primary earner’s health is questionable, consider file and suspend to allow the spouse to collect additional years of spousal benefits.