Getting a Bigger Check From Social Security

Not so long ago, 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. And more near-retirees are 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 so that you increase their worth. Play your cards right and you'll increase your household income by thousands of dollars a year now, plus ensure larger benefits later.

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.)

Subscribe to Kiplinger’s Personal Finance

Be a smarter, better informed investor.

Save up to 74%

Sign up for Kiplinger’s Free E-Newsletters

Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.

Profit and prosper with the best of expert advice - straight to your e-mail.

Sign up

Once you reach your normal retirement age, two things happen: You are no longer subject to the earnings cap (meaning that 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 -- or even wiped out completely -- if you earn more than the prescribed limit.

In 2010, you lose $1 in benefits for every $2 you earn over $14,160. The same limit is expected to apply in 2011. 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 $37,680 in 2010 during the months leading up to your 66th birthday. (The limit in 2011 will probably be the same.) 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.

And if you took your benefits early and now regret the decision, you still have a shot at a do-over. You can pay back all the benefits you have received so far and restart them at a higher level based on your current age. It's a big investment and certainly not right for everyone, but it can lock in higher income for life. If you're interested, don't delay. This option may soon disappear (see Social Security Do-Over at Risk).

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 what 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 anxious 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 now while his 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: Her spousal benefits will be reduced by 25% or more if she collects before her normal retirement age.) 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.

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 -- $1,000Ñin 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.

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 11, will each be entitled to monthly benefits worth up to half of what their mother collects.

But Cruz, 65, wants to keep working and delay collecting her own benefits until age 70. By electing the file-and-suspend strategy next year, when she turns 66, each of her daughters will receive about $800 per month until they turn 18. And 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 next 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 earlier this year. Just before his 66th birthday, Fry visited the 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

The strategy of restricting your claim to spousal benefits only applies to divorcees, too. 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 restrict your benefits to spousal benefits only, 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. All these complicated permutations about how and when to collect Social Security benefits are enough to make your head explode. But help is available at a new Web site. You can crunch your own numbers under various scenarios at www.ssincomeplanner.com for a small fee. One-year memberships run as low as $10 for widows to $40 for married couples.