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3 Ways to Maximize Social Security Benefits

Christine Benz
3 Ways to Maximize Social Security Benefits

What are some key rules to bear in mind when deciding how and when to claim Social Security benefits? Morningstar director of personal finance Christine Benz recently discussed this topic with Phil Moeller, co-author of a new book about Social Security called Get What's Yours .

Christine Benz: Let's talk about the three rules to maximize your Social Security benefits that you lay out in the book. The first is to be patient. What are the virtues of potentially delaying claiming Social Security?

Phil Moeller: When we started researching the book, we found out that most people take their benefits at age 62 or close to it, which is the earliest they can take benefits. If you wait until age 70, your benefits are 76% higher every month than they are at age 62. Being patient doesn't necessarily mean always waiting until age 70. What it does mean is that you need to do your homework; you shouldn't just rush down to Social Security on your 62nd birthday. You need to learn the rules of how you should claim your benefits. Being patient, in some cases, does involve waiting, but it always involves doing some learning and making sure you understand the implications of the benefit choices you have.

Benz: Are there any situations where it may not make sense to delay--at least not until age 70?

Moeller: There are many situations where it doesn't make sense to delay to age 70. For instance, spousal benefits don't get any higher if you wait until past full retirement age, which for most people is 66 these days. As such, there is no reason to delay a spousal benefit past the age of 66. In addition, in some cases, people need the money, and delaying isn't an option. And in other cases, people have significant health issues, or maybe they have a family history that suggests they are not going to live a long time. In those cases, we think it might well be in someone's interest to claim early.

And then there is another area where it might be in one's interest to claim early: If you've retired and you have school-age children at home, they can claim a benefit based on your earnings record. Let's say you're 62 years old, and you have teenagers or grade-schoolers at home. If you wait until age 70 to claim your benefits, your children would be too old to claim benefits on your record at that point. It's not only your benefit that's at stake, but it could be the benefits of your children, too. You really need to do your homework and say, "Well, maybe in this case, it would be better if I took benefits early because my kids can get benefits on my record and I can help pay for their college educations." It might make sense to claim early if you're a parent of minor children.

Read More: When Should You Take Social Security?
Is there any benefit to waiting beyond age 70 to begin claiming your benefits?

Moeller: No. We get a lot of questions about that, because people are worried about the tax consequences of suddenly having that benefit at age 70 raise their taxes. But I've never been able to come up with a scenario where you end up with less money by taking the benefit at 70 than you would by deferring longer.

Benz: Let's get into another of the rules that you discuss in depth in your book, Get What's Yours. The rule is "get all of what's yours." If we've been working, we are, of course, entitled to claim retirement benefits on our own work records. But there are other types of benefits you alluded to, such as spousal benefits. Let's talk about the full array of additional benefits that individuals may be eligible for in addition to their own retirement benefits.

Moeller: It's sort of a mind-boggling array of opportunities and choices. You have your benefit, and a spousal benefit, as you said. If you're divorced, you can get an ex-spousal benefit. As I said, your children can get benefits based on your work record.

If you pass away, there are survivor benefits. There are also survivor benefits that may be available for family members. In some cases, your parents might be able to claim a survivor benefit based on your record if you were supporting them, if you were basically the householder.

The key thing to keep in mind is that you can't take the full value of two benefits at once. When you really want to get everything that's yours, you want to think about scenarios in which you can take the full value of one benefit, while the other benefit is deferred, and then you can switch to the other benefit at a later time.

The greatest example of that is the spousal benefit, which we talk about at great length in the book. And the classic scenario is to take your spousal benefit while your own retirement benefit grows by 8% per year between your full retirement age and age 70. That's the closest thing we've found to what we call "free money," because you don't lose any of your own benefits. There's a chance that the government will eventually eliminate this so-called loophole, because this can be seen as more of a wealthy benefit, and perhaps it's not really what the program was designed for. And that's fine. But our point in the book is that people should get whatever they can under the rules that exist today--and you can execute this strategy today.

Benz: Let's go over that scenario that you just outlined, which is often referred to as the file-and-suspend strategy. How does file-and-suspend work?

Moeller: In order for spouse A to collect spousal benefits, spouse B has to have filed for his or her own retirement benefit. That's required to trigger the ability to have a spousal benefit. In the classic file-and-suspend scenario, when you reach full retirement age, you can file for your own Social Security benefit and thereby trigger your spouse's eligibility for spousal benefit. Then, you can suspend your own retirement benefit so your spouse can get what's called a "full spousal benefit," which is equal to half of your retirement benefit. Then, your own retirement benefit continues to grow by 8% per year. Here, timing becomes very important, and we strongly suggest people wait until their full retirement age to take advantage of the spousal benefit.

Read More: Want Help With the Big Social Security Decision?
That leads to your third rule for managing your Social Security income stream: Get the timing right. What are some of the key things that people should have in mind when timing Social Security?

Moeller: The most important thing is to understand what full retirement age means, as defined by Social Security. Full retirement age is now 66. It's gradually going to rise to age 67, and who knows what future Congresses may do in terms of raising the retirement age even higher. If you claim a benefit before full retirement age, bad things usually happen, because when you claim a benefit before full retirement age, you often simultaneously trigger a second benefit.

Here's an example: A husband has claimed his retirement benefit, and his wife wants to claim her spousal benefit and she is not yet age 66. If she files for a spousal benefit, she automatically triggers her own retirement claim, which many people don't really want to do and they don't know they are doing it. The reporting forms aren't clear. You don't get both benefits; you get an amount that's roughly equal to the greater of the two benefits. But then, for the rest of your life, you basically can't take the optimal amount of benefits.

When you claim early, you also are subject to what are called "early claiming reductions." If you claim at age 62, your retirement benefit is 25% less than what it would be at 66. If you claim a spousal benefit at 62, it's 30% less than what it would be at 66. Don't ask me why they have different penalties; it's why we needed to write a book.

Benz: And you delve into a lot of specific questions in the book, because there are so many different scenarios that involve widows and widowers and divorcees and various family permutations.

Moeller: And government workers, in terms of pension offsets and windfall programs that Social Security has. It's very complicated. We get questions every day that we haven't seen before. There are a lot of possible combinations.

Read More: How Your Social Security Benefit Is Calculated