Tactics for Taking Social Security

EDITOR'S NOTE: This article was originally published in the November 2007 issue of Kiplinger's Retirement Report. To subscribe, click here.

The age at which you start collecting Social Security benefits can have a big impact on lifetime income. In some cases, you can make the most of your benefits by changing the start date even after you filed. Two little-publicized tactics can help you stretch your benefits, especially if you're married.

Put benefits on ice. If a spouse -- let's say the wife -- earned less than half of what her husband earned, she can collect a spousal benefit, which is 50% of his benefit (her benefit will be reduced if she collects before her full retirement age). Once her husband dies, she can collect a survivor benefit, which is 100% of his benefit.

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If you want your spouse to collect the biggest survivor benefit possible, you should delay collecting your own benefit. For each year you delay beyond your normal retirement age, you'll get an 8% boost in benefits. If your normal retirement age is 66 and you wait until 70, your wife will receive 32% more in survivor benefits when you die, plus any accumulated cost-of-living adjustments (COLAs).

But there's a catch. Your wife can't apply for spousal benefits until you file for your own benefits. James Mahaney, vice-president of Prudential Financial, has this suggestion: You can file for benefits at full retirement age and then immediately suspend them. Once you file, your wife can apply for spousal benefits; you can file again for yours years later.

Mahaney shows how delaying can boost your lifetime benefit and the survivor benefit. A primary breadwinner who was due $12,000 a year at age 66 would get $13,506 at age 70, assuming a yearly 3% COLA. The same person who filed at 66 and then suspended benefits would get $17,828 at 70, which includes delayed credits and four years of COLAs.

You can only take a "voluntary suspension" when you reach your full retirement age. You can ask for a suspension when you first apply for benefits or after you start receiving them. The Social Security Administration will take a request by phone or in writing.

Return your benefits. If you claim your Social Security benefits early, at age 62, your benefits will be reduced by 25% forever. At some point, you may decide that this was a big mistake. If you think you'll live a long time, why take a permanent cut? Also, if you're the primary breadwinner, your spouse's survivor benefit will be lower as well.

The good news is that you're not locked into that early decision. You can file for a "withdrawal of application" at any time before you turn 70. "The reason this provision exists is for people who did not look ahead," says Henry Hebeler, author of Getting Started in a Financially Secure Retirement (John Wiley & Sons, $20).

To undo your early decision, you must return all of the money that Social Security paid you over the years -- in a lump sum. If your wife is claiming spousal benefits, she must return her accumulated benefits as well. But you won't have to pay any interest on the benefits you collected.

Consider these numbers calculated by Hebeler, who runs AnalyzeNow.com, a retirement-planning Web site. If you receive a yearly benefit of $12,000 at 62, your benefits will total $63,710 by age 66 assuming a 3% annual COLA. If you set aside the money in an account returning 5% after taxes, you'll accumulate $71,960 -- or a tidy $8,250 profit. That means at 66 you can buy higher lifetime benefits by withdrawing your claim -- and you get to keep the extra $8,250.

But it's not a good idea to file early for benefits simply to earn some easy cash. If you die before you withdraw your claim, your spouse's survivor benefit will be stuck at the lower benefit, Hebeler warns. And you'll need to recoup the taxes that you may have paid on the benefits when you received them -- and that can be complicated.

You'll need to file a Request for Withdrawal of Application (SSA Form 521). You can find the form at www.ssa.gov or call 800-772-1213. The Social Security Administration will let you know how much you must repay.