Make the Right Moves to Boost Benefits

EDITOR'S NOTE: This article was originally published in the April 2011 issue of Kiplinger's Retirement Report. To subscribe, click here.

What do boxer George Foreman, actress Meryl Streep and singer Bruce Springsteen have in common? Aside from fame, they're all turning 62 this year, and they need to decide whether to start claiming Social Security benefits.

Sure, none of them needs the cash, but like many of you, they'll need to engage in some complex calculations. And just because George, Meryl, Bruce and you can apply at 62 doesn't mean you all should. Delaying may be the best way to maximize your benefits, especially if you're married. We'll go over several strategies to help you get the most from your benefits.

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But first, the basics. Those born between 1943 and 1954 will get their "primary insurance amount" at 66, which is their full retirement age. You can claim benefits as early as age 62, but your monthly check will be cut by 25% for the rest of your life. For every month you wait beyond 62, your benefit will increase by a fraction of a percent. If you claim at age 64, for instance, you will receive 86.7% of your primary insurance amount.

For each year you delay claiming between 66 and 70, you'll get a delayed credit of 8%, plus cost-of-living adjustments. "Having a larger income stream of that sort is extremely valuable," says Rick Miller, a certified financial planner with Sensible Financial, in Waltham, Mass. Miller usually recommends that his clients delay to take advantage of this income stream of inflation-adjusted lifetime benefits.

A lower-earning spouse can claim a benefit based on his or her work record at 62. Or the spouse can claim a "spousal" benefit, as long as the other spouse has started to collect benefits. If the lower earner is at full retirement age, the spousal benefit is 50% of the higher earner's primary insurance amount.

But the spousal benefit will be reduced if the lower earner collects the benefit before reaching full retirement age. If the lower-earning spouse first claims a benefit based on his or her earnings and later "steps up" to a spousal benefit, the spousal benefit will be reduced as well.

Many financial planners and academic researchers are urging seniors to focus on Social Security as longevity insurance -- that is, a benefit that will provide you income in your old age -- instead of as a source of immediate cash flow. "People underestimate the future value of that benefit," says Clarissa Hobson, a certified financial planner for Carnick and Co., in Colorado Springs, Colo.

One way to look at the value of delaying benefits is to compare Social Security to the cost of buying the same amount of guaranteed income in the private market. Let's say a 62-year-old Virginia man would receive $1,125 a month if he claimed at age 62, but $1,980 a month if he waited until 70. That's a difference of $855 a month in benefits.

If this man claimed benefits at 62 and wanted to buy an extra $855 in guaranteed income at 70, he'd have to spend $116,660 for an immediate income annuity. And that's without an inflation adjustment or a 100% survivor benefit.

Delaying makes particular sense if you have a pension, says Jonathan Blumenthal, senior vice-president at Peak Capital Investment Services, in Dallas. In that case, your pension, which is probably not adjusted for inflation, will cover expenses in early retirement. Later your Social Security benefit's cost-of-living adjustments will become an inflation hedge.

It also makes sense to delay if your income will spike in those last years of work. Your benefit is calculated based on your top 35 years of earnings. Any years with no earnings will factor in at zero and will be averaged into the calculation.

Greg Graman, 63, expects to boost his benefit by staying in the workforce. For the past six years, he's been an assistant professor in the School of Business and Economics at Michigan Technological University in Houghton, Mich.

Graman had six years of zero earnings in his record because he left the private sector after 22 years to go to graduate school. "By continuing to work, I replace those zeros with substantially higher numbers," says Graman. He's now worked long enough to wipe out those zero years. And because he plans to work until his late sixties, he also expects to displace some lower-earning years in his earnings record.

Before deciding when to apply, you and your spouse should look over your most recent Social Security statements. The statement will note how much you will get at 62, 66 and 70. Keep in mind that the estimates assume you are working up to the listed ages. Or you can use the Retirement Estimator tool at www.socialsecurity.gov/estimator, to play with different scenarios. (Note, the Social Security Administration has suspended mailing benefit statements through the remainder of the current fiscal year. When the agency resumes mailings in October, paper statements will be sent only to workers who are 60 or older.)

Once you review your numbers, you can figure out which of the following strategies or circumstances could apply to you. In many cases, it makes the most sense to wait. "So many of these strategies require you to be over full retirement age," says Elaine Floyd, director of retirement and life planning for Horsesmouth, a consulting firm that works with financial advisers.

If you're still working. Most experts say it usually does not make sense to claim early while you're still working. If you start claiming before full retirement age, Social Security will withhold part of your wages to satisfy the earnings test. "You don't want to start Social Security if you're producing enough income to get your benefits clipped," says Wayne Copelin, president of Copelin Financial Advisors, in Sugar Land, Tex.

In 2011, you lose $1 for every $2 you earn over the earnings limit of $14,160. Say you are earning $30,000 and claim a $1,500 benefit at 62. Because $30,000 is $15,840 over the limit, you'd lose $7,920 in benefits. The earnings test applies to survivor and spousal benefits, too.

In the year you reach full retirement age, you lose $1 for every $3 in earnings over $37,680 before your birthday month. The earnings test ends in the month you reach full retirement age.

If you are receiving benefits and unexpectedly return to work, let Social Security know quickly. If the tax return shows earnings that should have triggered reduced benefits, you'll have to pay back the excess in a lump sum or see future benefits reduced to compensate for the earlier overpayment.

Benefits lost to the test are not gone forever. For any month you forfeit benefits to the earnings test, Social Security will refigure your benefits going forward to compensate you for that "lost" money.

You wait, spouse doesn't. Let's say you're the higher earner and you would like to maximize your own benefit by delaying until 70. If your wife is 62 or older, she could collect benefits based on her own earnings record, but perhaps she'd get more money with a spousal benefit. One catch -- she can't collect a spousal benefit until you file for your own.

Here's a way to boost income immediately: As long as you're full retirement age, you file for your benefit, and your wife applies for a spousal benefit. You then ask Social Security to suspend your benefits. Your wife will receive a spousal benefit. You can continue to work and accrue delayed credits until you reapply for benefits. "This dramatically increases the benefits the high-earning spouse will receive," says Hobson.

This file-and-suspend maneuver also helps provide for your lower-earning wife if you die first. She'll step up to a survivor benefit that will be 100% of your benefit at the time of your death. The survivor benefit will include any earned delayed retirement credits and cost-of-living adjustments.

Maximizing the survivor benefit was a major goal for Greg Graman and his wife, Sandra. Greg, who is the higher earner, will qualify for a lump-sum retirement benefit from his employer at 68 and doesn't plan to take his Social Security benefit before then.

Sandra, who is a part-time preschool teacher, started taking a benefit based on her earnings two years ago at 62. But because her $500 benefit is about half of the spousal benefit she could receive on Greg's record, he intends to file and suspend his benefits at age 66. Sandra can then switch to a larger spousal benefit, and Greg's own benefit will continue to grow at 8% a year.

Sandra claimed early on her own record to boost the household income. "If she waited to do anything until 66, she would have left those four years of benefits on the table," Greg says.

You wait, but take a spousal benefit. Typically it is the lower-earning spouse who collects a spousal benefit. But there's nothing to say the higher earner can't opt for a spousal benefit -- temporarily. To employ this strategy, the higher earner must be full retirement age.

Here's how it works: You are the higher-earning spouse and have hit full retirement age, but you want to delay your benefit until 70. In the meantime, you can bring in extra money by applying for a spousal benefit for yourself.

First, your lower-earning spouse claims her own benefit. Let's say she's 62; she'll get 75% of her full benefit because she is applying early. Then, you can apply for a spousal benefit. Because you are full retirement age, you get an extra bonus: Rather than getting 50% of her current reduced benefit, you get 50% of her primary insurance amount.

This strategy is known as "restricting an application" to a spousal benefit only. The higher earner must be full retirement age. If you're younger, the Social Security Administration will automatically give you the highest benefit you're entitled to, which is likely the benefit based on your earnings. "If you start taking benefits before full retirement age, you don't have a choice of which benefit to take," says Peggy Sherman, director of financial planning for Briaud Financial Advisors, in Bryan, Tex.

At any time until 70, you can switch to your own higher benefit. At that point, your wife could switch to a spousal benefit. However, her payment will be less than 50% of your primary insurance amount because she claimed her own benefit early. Still, her survivor benefit will equal 100% of your benefit if you die first.

Not all Social Security Administration personnel are familiar with this strategy. Kiplinger's Retirement Report has interceded on behalf of several readers who encountered skeptical government employees. If you face trouble when you apply, show the employee the following information from the Social Security Web site: www.socialsecurity.gov/retire2/yourspouse.htm. (Look at the section called "If you or your spouse are full retirement age.")

This information helped a couple in Long Island, N.Y., who subscribe to Retirement Report. Mr. Miller (who didn't want his full name used), age 67, was already receiving his benefit. Mrs. Miller, 66, wanted to apply for a spousal benefit of about $1,100 a month and delay her own benefit until 70, when she would be eligible to receive about $2,800 a month -- $800 more than if she collected her benefit at 66.

When she visited the Social Security office near her place of employment last November, a supervisor told her that she could not restrict her application to the spousal benefit. After Retirement Report directed the couple to the Social Security Web site, Mr. Miller says, "Two days later, she went back and the papers were put through. All was fine."

Then the Social Security computer center denied the application twice. After the couple requested more help from Retirement Report, a Social Security representative followed the case personally. Mrs. Miller finally received notification that her spousal benefit would start at the end of March.

Back to work. If you return to work after you started receiving benefits, you can suspend your benefits if you're full retirement age. Say you intended to claim at 70, but you started collecting benefits before full retirement age after a layoff. Now you've found a new job.

While your benefits are suspended, you will earn delayed retirement credits through age 70. However, the credits will be based on the reduced amount you had been receiving, not the primary insurance amount.

If you're divorced. You may be entitled to a spousal or survivor benefit based on your former spouse's earnings record. To be eligible, you must have been married for at least ten years and be at least 62 to receive a spousal benefit. If your ex dies, you can claim a survivor benefit at 60 (or 50 if you're disabled).

If you remarry, you will lose the benefits of your former spouse, at least until that second marriage ends in divorce or death. If that happens, you may be able to select the best benefit among your former spouses. (Note: If you remarry after age 60 and you are taking a survivor benefit on your ex's record, you can still receive the survivor benefit.)

The Social Security rules for divorced couples are pretty much the same as those for married couples. For instance, if you collect a spousal benefit when you are at full retirement age, it's generally 50% of your ex-spouse's benefit. A survivor benefit is equal to 100% of the deceased spouse's benefit if the survivor waits until full retirement age to claim it. If a survivor claims earlier, the benefit will be reduced.

One difference: Even if your ex has not applied for benefits, you may be allowed to collect spousal benefits. To qualify, your former spouse must be eligible for benefits, which means he or she must be at least 62, and you must be divorced for at least two years.

Divorced women can use the restrict-an-application strategy to maximize their own benefit -- and that can be a boon for those trying to catch up on retirement savings. "It's a wonderful strategy for divorced working women," says Floyd.

Say a woman whose own benefit with delayed retirement credits will be larger than the ex's spousal benefit. At full retirement age, she takes her ex's spousal benefit and continues to work. At 70, she switches to her own bigger benefit.