Making Your Money Last

Secrets to Maximizing Social Security

Despite a temporary shortfall, the nation's primary retirement system continues to pay full benefits. We show you how to make the most of yours.

By Mary Beth Franklin, Senior Editor, Kiplinger's Personal Finance

August 5, 2010

It's official: High unemployment and a resulting decline in payroll-tax collections have taken a toll on the Social Security program. Benefits will exceed revenues for the first time in 2010 -- six years ahead of previous projections -- according to the Social Security Trustees' 2010 report released Thursday. But the nation's vital retirement program is expected to slip back into the black -- at least temporarily -- when the economy recovers, before posting increasingly larger deficits as more baby-boomers reach retirement age.

There will still be plenty of reserve funds to continue paying full benefits for nearly 30 years. But without reforms, the trust fund is projected to run dry around 2037, when tax revenues will be sufficient to pay only about three-fourths of promised benefits. "The sooner action is taken, the more options will be available and the fairer reforms will be to our children and grandchildren," Treasury Secretary Timothy Geithner said in response to the trustees' report. Reform proposals include raising the retirement age for full benefits to 70, changing the formula for calculating annual inflation adjustments of benefits, and lifting the cap on the amount of wages -- currently $106,800 -- subject to Social Security taxes.

The idea of guaranteed income for life that keeps pace with inflation holds fresh appeal in an era of disappearing pensions and erratic stock-market returns. There's also a growing awareness of the value of working longer and waiting to collect Social Security benefits until normal retirement age or later, when they are worth more. But over the past few years, savvy Kiplinger's readers have also learned that there are a few clever -- and perfectly legal -- little-known strategies to time the collection of your retirement benefits that can immediately boost your household income by thousands of dollars a year and provide larger benefits later for your spouse or minor children when you die. Married couples and parents of minor children who wait until normal retirement age to collect benefits can employ some of these strategies to boost their overall income.

STRATEGY 1 : File and suspend

You can boost household income immediately and provide for a larger survivor benefit later by using this "file and suspend" strategy: File for your retirement benefits so your spouse or dependent children can collect their benefits based on your earnings record, then immediately suspend your own benefits and delay claiming them until they are worth more at an older age. Your benefits will increase by an additional 8% for each year you delay collecting beyond your normal retirement age, up until age 70. (You must be at least full retirement age -- which is age 66 for those who claim benefits this year -- to use this strategy. It is not available to workers who claim benefits earlier.)

The strategy works best if one spouse has substantially higher lifetime earnings than the other. Older workers, whether married or single, who have dependent minor children can also take advantage of it. That's exactly what Lucia Cruz, a trust-company employee from Hollywood, Fla., plans to do when she turns 66 next year.

Cruz, who describes herself as "happily divorced" for the past 30 years, adopted twins Patricia and Alicia in 2002. Each of the girls, now 11, will be entitled to a monthly benefit worth up to half of Cruz's when she starts to collect Social Security. But she wants to keep working and delay collecting her own benefits. If Cruz uses the file-and-suspend strategy, 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 instead of the $1,640 she would get if she were to begin claiming benefits at 66.

STRATEGY 2: Collect some now, more later

Another strategy is to collect half of your spouse's benefits now and delay collecting your own benefits until later, when they will be worth more. It works best for two-career couples.

Al Fry, a retired U.S. Air Force officer who works part-time at an athletic club, was delighted to read a recent Kiplinger's article about the advantages of restricting your Social Security claim to spousal benefits only. Back in 2006, when he turned 62, Fry visited the Social Security office near his home in Fairfield, Cal., and was told -- correctly -- that he had to claim the highest benefit available to him, whether based on his own work record or based on the earnings of his wife, Sandra. The SSA said he could not limit his claim to spousal benefits only. But that rule changes once you hit the magic age of 66 (or a bit older if you were born after 1954), when you can get more creative with your benefit-collection strategies.

Fry hightailed it to his local Social Security office a month before his 66th birthday -- and this time got the answer that he wanted. Limiting his claim to spousal benefits based on Sandra's earnings as a library assistant for nearby University of California at Davis, Fry will receive $472 per month for the next four years, boosting their household income by more than $5,600 a year.

And by delaying his own retirement benefits, he'll receive about $2,100 per month when he turns 70, compared with $1,500 had he started collecting them at 66. If Fry dies first, Sandra will receive a survivor benefit equal to 100% of the monthly amount Fry collected during his lifetime, as long as she is at least normal retirement age at the time.

STRATEGY 3: Retirement do-over

Some retirement decisions are irreversible, but many retirees are delighted to learn that choosing when to start collecting Social Security benefits is not one of them. If you are already receiving benefits, you can take advantage of an obscure provision that allows you to repay your benefits, interest- and penalty-free, and then reapply for a bigger monthly check at an older age.

Maybe you decided to collect early out of fear that you wouldn't live long enough to collect full benefits. But now that you've made it to 70, you may regret your decision and wish you had held out for a bigger monthly check. In order to get one, you must first file IRS Form 521 ("Request for Withdrawal of Application") at your local Social Security office.

Your retirement benefits will stop almost immediately, and if your spouse receives benefits based on your work record, his or her benefits will stop, too. Then the SSA will send you a letter telling you how much you need to repay (including any spousal benefits). That process may take several weeks or even months. Once you repay the benefits -- which can top $100,000 -- you can reapply for a higher payment based on your current age.

Note that when your benefits stop, so do the automatic deductions that cover your Medicare premiums. You'll have to pay the Part B premiums yourself -- currently $110.40 per month for new beneficiaries who enroll in 2010 -- until your Social Security benefits resume.

Hank Phillips of Pottstown, Pa., decided that the do-over strategy had his name written all over it after he watched the stock market's bumpy ride diminish the savings that he and his wife, Deirdre, accumulated over a lifetime. "The do-over strategy was unaffected by the stock and bond markets, and it had guaranteed income backed by the U.S. government," says Phillips, 70. "It included benefit increases based on cost-of-living adjustments and had a death benefit for my wife in the event that I die first."

The former marketing manager started receiving Social Security benefits at age 62, and after years of annual cost-of-living adjustments, his monthly benefit had increased to about $1,675. But that's substantially less than the more than $2,800 per month he could have collected if he had waited until age 70. Although he had to repay more than $142,000 in benefits that he and Deirdre, 68, had received over the years, Phillips felt it was a bargain compared with what it would cost to buy an immediate-payout annuity with annual cost-of-living increases from an insurance company.

As an added bonus, you can claim an itemized deduction or tax credit -- whichever is more beneficial -- for taxes you paid on past Social Security benefits in the year you repay them (see IRS Publication 915, Social Security and Equivalent Railroad Retirement Benefits, for details).

It took about six months from the time Phillips filled out Form 521 until he began receiving his new, higher benefit -- an increase of $1,175 per month over his previous amount -- plus a check for three months of retroactive benefits dating back to his 70th birthday. Despite the delays and hiccups along the way, Phillips says it was worth the effort to increase their monthly benefit by 160%, with built-in cost-of-living adjustments -- no matter how long he and Deirdre live.

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