Not so long ago, some people planning for retirement wrote off Social Security as an endangered benefit and a marginal addition to their post-career income. But in an era of disappearing pensions and erratic stock-market returns, the idea of guaranteed income for life that keeps pace with inflation holds fresh appeal. Increasingly, near-retirees are becoming aware of the value of working longer and waiting to collect Social Security benefits until the benefits are worth more.
But there are also a few clever -- and perfectly legal -- ways to time the collection of your retirement benefits to increase monthly checks for you, your spouse and any minor dependents. Play your cards right and you could increase your household income by thousands of dollars a year now, plus ensure larger benefits later.
For many middle-income Americans, deciding when to begin collecting Social Security benefits could be one of the most important retirement-income decisions they ever make. The difference between a good decision and a bad one could amount to more than $100,000 over the lifetime of a married couple.
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The key to maximizing your family's Social Security income is to wait until your normal retirement age -- currently 66 for anyone born between 1943 and 1954 -- to collect benefits. The normal retirement age will gradually increase to 67 for anyone born in 1960 or later. (Of course, that's under current law. Future Social Security reforms could change those rules.)
Once you reach your normal retirement age, two things happen: You are no longer subject to the earnings cap (meaning you can continue to work without jeopardizing any of your Social Security income), and you can get creative with your collection strategy to maximize your benefits.
The Basics
Although you can collect Social Security benefits as early as age 62, you may not want to. Your retirement benefits will be reduced by 25% or more for the rest of your life. And if you continue to work, your benefits could be further reduced -- even wiped out completely -- if you earn more than the prescribed limit.
In 2011, you lose $1 in benefits for every $2 you earn over $14,160. A more generous earnings cap applies in the year you reach your normal retirement age: You lose $1 in benefits for every $3 you earn over $3,140 per month during the months leading up to your 66th birthday. Once you reach your normal retirement age, the earnings cap disappears. Other types of income, such as pensions, interest and dividends, do not reduce your Social Security benefits.
Of course, for some people, waiting to collect Social Security is not an option. If you need the money, or you are in poor health and fear that you may not live long enough to collect benefits at your full retirement age, you should collect your Social Security benefits as soon as you are eligible at age 62. That assumes you are no longer working or, if you are, your earnings don't exceed the annual earnings limit by much.
But if you're able, it pays to wait. After you reach your normal retirement age, you can increase your benefits by an additional eight percentage points for each year you delay collecting, up to age 70, creating a larger base for future cost-of-living adjustments and a bigger benefit for a surviving spouse.
No More Do-Over
In the past, retirees who collected benefits early and regretted the decision later could repay all the benefits they had received and restart their benefits at a much higher level based on their current age. But that is no longer an option. In December, the Social Security Administration revised its do-over rule. From now on, you can only suspend benefits once during your lifetime, and it must be within 12 months of your initial claim. You will no longer be able to repay past benefits, but once you resume collecting retirement benefits, Social Security will recalculate the amount to take into account the months or years you suspended them, resulting in a larger payment than your initial amount.
Combo Approach
For some married couples, a combination strategy may make sense. The lower-earning spouse (usually the wife) could collect Social Security benefits early, and the higher-earning spouse could delay claiming benefits for as long as possible, up to age 70. Although the wife's retirement benefits will be permanently reduced, collecting benefits early will have no impact on her survivor benefits as long as she is at least normal retirement age when she begins collecting survivor benefits. If her husband dies first, she will be entitled to 100% of the monthly amount he received during his lifetime -- with no reduction in benefits. Of course, her own retirement benefit would disappear at that point. Read on to discover a few more creative strategies.
File and Suspend
Sometimes, the spouse who has little or no work history (again, often the wife) may be eager to collect spousal benefits -- worth up to half of what the main breadwinner receives. Normally, the wife must wait for her husband to file for his Social Security benefits before she can collect her share. But there's a way for her to collect spousal benefits while her husband's retirement benefit continues to grow.
As long as he waits until he reaches his normal retirement age, the husband can exercise a strategy known as file and suspend. That means he can file for his benefits, entitling his wife to receive spousal benefits immediately; then he can suspend his own benefits and continue to accrue delayed-retirement credits until age 70. (Note: If the wife collects benefits before her normal retirement age, her spousal benefits -- normally worth half of her husband's benefit -- will be reduced by 25% or more.) At 70, his benefits would be worth 132% of what they would have been at 66, creating a larger base for future cost-of-living adjustments. (Spousal benefits are based on half of the worker's benefit at normal retirement age, not including the delayed credits. But survivor benefits are worth half of the husband's amount, including the delayed credits).
Let's say he is entitled to $2,000 a month at age 66. He could file and suspend so that she could collect half that amount -- $1,000 -- in spousal benefits at her normal retirement age. But if she claims benefits as soon as she is eligible at age 62, her share would be reduced by 25%, to $750 per month. The reduction for collecting benefits early at age 62 will increase to 30% when the normal retirement age rises to 67 under current law.
Kids Can Collect, Too
When you collect Social Security retirement benefits, dependent children under age 18 who live with you -- including stepchildren, adopted children and, in some cases, grandchildren -- are entitled to benefits worth up to half of the amount you are eligible for. Retirees can collect benefits as early as age 62 to trigger benefits for their minor kids, but waiting until normal retirement age offers more options.
For example, although the file-and-suspend strategy is normally used by married couples, it can also be used by older workers -- married or single -- who have dependent minor children. Lucia Cruz of Hollywood, Fla., who describes herself as "happily divorced" for the past 30 years, adopted twins Patricia and Alicia in 2002. The girls, now 12, are each entitled to monthly benefits worth up to half of what their mother collects.
But Cruz, 66, wants to keep working and delay collecting her own benefits until age 70. Now that she has reached her normal retirement age, Cruz chose to file-and-suspend her benefits. Each of her daughters will receive about $625 per month, adjusted for inflation in future years, until they turn 18. (Like spouses, minor children are eligible to collect benefits worth up to half of the retiree's amount, subject to a maximum family benefit amount).
By waiting until 70 to collect her own benefits, Cruz will receive approximately $2,250 per month, compared with the $1,640 per month that she would get if she began claiming benefits this year.
Claim Now and Later
Another strategy allows you to collect half of your spouse's benefits now and delay collecting your own benefits until they are worth more later. This strategy works best for two-career couples with similar incomes.
As long as you wait until your normal retirement age, you can restrict your Social Security claim to spousal benefits only -- assuming your spouse is collecting benefits. That's what Al Fry, a retired Air Force officer from Fairfield, Cal., did last year. Just before his 66th birthday, Fry visited his local Social Security office to file a benefits claim and requested that they be restricted to spousal benefits only. Now Fry, who works part-time at a sports club, receives $472 per month based on the earnings record of his wife, Sandra, who is a library assistant at nearby University of California at Davis. That boosts their income by about $5,600 a year. Because he is 66, Fry can work without worrying about losing any benefits to the earnings cap.
And by delaying his own retirement benefits for four more years, he will see them grow to about $2,100 per month when he turns 70, compared with $1,500 if he were to start collecting today. If Al dies first, Sandra will step up to the larger survivor benefit, equal to 100% of what Fry collected during his lifetime, as long as she is at least normal retirement age at the time.
Collect on Your Ex
Normally, to be eligible to collect on your ex, you must have been married for at least ten years and divorced for at least two years, and you may not be currently married. You can collect benefits as early as age 62 (but earnings-cap limits apply if you continue to work), as long as your ex is old enough to be eligible for benefits -- even if he or she has not yet collected them. And it doesn't matter if your ex has remarried. Collecting spousal benefits on your ex will not affect the benefits that his or her current or other former spouses receive.
But if you wait until age 66, you can also use the strategy of restricting your claim to spousal benefits, allowing your own benefits to accrue delayed-retirement credits. Then you can switch to your own benefit, assuming it's larger, at age 70.
Different rules apply for widows. They may collect survivor benefits as early as age 60 (rather than age 62), but they are still subject to the annual earnings-test limits if they continue to work while receiving benefits. However, if they are entitled to retirement benefits based on their own work history, they may collect survivor benefits first and switch to retirement benefits later, or vice versa -- whichever results in a higher benefit.
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