I'm of the opinion that every good advisor knows a trick or two about creating retirement advantages for clients. However, you may not be familiar with a lesser-known – yet useful – Social Security strategy we use that can be helpful in certain situations. It’s called the start-stop-start strategy.
The start-stop-start strategy plays on the rules outlined by the Social Security Administration to potentially optimize income payouts for retirees. In many cases, Social Security represents one of the largest retirement "assets" you will receive, so it is important to understand the different strategies to help you maximize it.
Generally speaking, 40 working credits are needed to qualify for a Social Security retirement benefit. The benefit is based on work history and is expected to start at Full Retirement Age (FRA) - ages 66 or 67 for most. The rules allow the benefit to be collected as early as age 62, subject to an earnings test. When collecting benefits early at age 62, the monthly benefit will be reduced by about 25% for people born between 1943 and 1954, and a 30% reduction at age 62 for those born in 1962 or later. For those born between 1954 and 1960, your FRA will be 66 and "x number" of months, i.e. 66 and 8 months - find your FRA and reduction amounts at 62 here.
While you can start taking benefits as early as age 62, delaying the benefit until up to age 70 is also allowed. Delaying until 70 increases your benefit by about 8% per year of delay, resulting in an increase of 24%-32% above the FRA amount (depending on your exact FRA). In this case, more money will generally be paid out monthly over a shorter expected lifetime.
The start-stop-start strategy allows an individual who collected Social Security prior to their FRA to submit a request to the administration to suspend the benefit once FRA is attained. Doing this starts the 8% per year increase until age 70, when benefits would resume.
Reasons you might consider using the start-stop-start Social Security strategy
- You need supplemental income during the early years of retirement but have resources to support the later years. Various things could drive this decision, such as paying off your mortgage.
- A tag team approach is desired when a meaningful age difference exists between you and your spouse. For example, the older spouse’s benefit could be started early and then stopped at FRA. The younger spouse then starts their benefit early and then suspends it at FRA. Both spouses would restart collecting benefits when each one reaches age 70.
- You wish to delay triggering an annuity benefit in order to slip into a higher guaranteed payout rate - because you would be older.
- Other income streams are available that will pay out later, but not soon enough to provide you what you need in the early years of retirement.
There could be many variations to start-stop-start scenarios:
- The Delayed Retirement Credits (DRCs) (8% per year until age 70) help to restore the benefit that was reduced by taking your benefit before your FRA (66 or 67). Not only that, but it also provides you with higher Cost of Living Adjustments (COLA) every year after you begin taking benefits for the long haul.
Let's say your full social security benefit at your FRA of 67 is $2,000. You become eligible to take your benefits early at age 62, and decide to do so. This means you will get a 30% reduction in benefits and end up with a $1,400/mo benefit. You collect that benefit until age 67 and then file to stop it and let it "marinade". You then receive an 8% increase per year until age 70 on that $1,400 reduced benefit. That brings you to roughly $1,764/mo at age 70 (not accounting for COLAs), which isn't the $2,000 you would have received if you waited until your FRA initially, but is at least partially restored. If you included the COLA adjustments you would receive during those years, it would be even closer.
- A delayed higher benefit could be important for the recipient or survivor in the case of an early death of either spouse. A survivor is entitled to 100% of a deceased worker’s benefit, including any DRCs (if they passed away after their FRA and were accumulating DRCs). So maximizing a retirement benefit of one spouse also creates the maximum survivor benefit for remaining spouse. Claiming Social Security early surely reduces future survivor benefits, but with this strategy you can help restore some of that potential survivor benefit.
A few important things to keep in mind
- If other members of the family are receiving a benefit that is directly contingent on that of the recipient (this could be the spouse or a dependent child), suspending your benefits will also discontinue the benefit for them.
- Medicare premiums are taken out of Social Security if a benefit is being received. Suspending the benefit requires making alternative direct quarterly payments to Medicare.
- The spouse with the highest benefit should generally try to delay taking Social Security as long as possible as their amount will essentially serve as the survivor benefit for both.
- The rules surrounding Social Security are complex. Start-stop-start is not a single-filing process. Instead, it requires multiple filings to accomplish.
Read here for the allowance of this provision: https://www.ssa.gov/planners/retire/suspend.html
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Cameron Valadez is a CERTIFIED FINANCIAL PLANNER™ in Riverside, California
Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, and CFP® in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.
The information has been obtained from sources believed to be reliable but Waddell & Reed does not guarantee the accuracy or completeness of the information. This information is for educational purposes and it is not financial advice or a specific recommendation of any kind. Please consult with a financial professional regarding your personal situation prior to making any financial related decisions. (05/20)