Social Security Claiming Tricks to Maximize Payout

by Robert Powell

With nearly 10,000 people turning 65 every day over the next 20 or so years, it’s not hard to imagine a new reality show called “Extreme Social Security Claiming Strategies and Tactics”, especially in the wake of news that beneficiaries will be getting just a 1.7% increase in their benefit in 2013. That show, sadly, is not yet a reality.

But what is real is this: There are a dozens of lesser known, often overlooked Social Security claiming strategies and tactics that are worth sticking in your back pocket, just in case there’s an audition call.

And case in point No. 1 is what Bill Meyer refers to as the “rat holes,” the ages at which a single retiree should never, ever, ever claim Social Security. Or at least not claim Social Security if they want to maximize the present value of their Social Security benefits.

Single retirees whose full retirement age (FRA) is 66 and who aren't affected by the earnings test should not claim Social Security in any month near FRA nor three years prior to FRA, according to Meyer, who is the co-author of “Social Security Strategies: How to Optimize Retirement Benefits,” and CEO of Social Security Solutions, Inc.

And the reason, according to Meyer, has to do with the pattern of reductions in benefits for beginning benefits before FRA and delayed retirement credits for delaying benefits until after FRA.

“If the single retiree begins benefits at FRA, she (or he) receives his Primary Insurance Amount or (PIA),” Meyer wrote in a recent paper. “If she begins benefits before FRA then her benefits are decreased by 5/9 percent of PIA per month for the first 36 months plus 5/12 percent of PIA for each additional month. Delayed retirement credits are 2/3 percent per month for each month benefits are delayed from FRA to 70.”

And, without going to deep into the weeds, that math causes what Meyer refers to as the “rat holes,” those ages at which single retirees should not claim Social Security.

In essence, what happens is this: The total value of your stream of Social Security benefits—the present value—would be greater if you didn’t claim at FRA or three years prior to FRA.

There are plenty more of these little-known and underused claiming strategies and tactics. Here’s a look at some of them.

Benefits for minors and spouses

In a relatively rare instance when a worker claims Social Security and is married to someone who is taking care of a child under the age of 16 or taking care of a disabled child, that spouse can collect 50% of the benefits regardless of the spouse’s age, said Lita Epstein, author of The Complete Idiot’s Guide to Social Security. And if the worker dies, the spouse’s benefit, even if the spouse is younger than 62, would increase to 75% as long as he or she is still caring for children under the age of 16, she said.

In addition, Epstein said, unmarried children under the age of 18 (or up to 19 if they are attending elementary or secondary school full time) are eligible for benefits if their parent is retired, disabled or deceased. “An eligible child can be a biological child, an adopted child or a stepchild,” she said. “And, a dependent grandchild can also qualify.

To be fair, there is a limit to the total amount a family can receive on a worker’s benefit, Epstein said. And the limit varies depending on individual circumstances, but is around 150% to 180% of a worker’s Social Security benefit. “If the total for dependent family members is greater than the family limit, the amount each family member receives is reduced proportionately,” Epstein said. “The worker’s benefit is not affected by this adjustment.

Dennis Heywood, the owner of Social Security Solutions, gave this example: If the wage earner’s age 66 benefit is $2,000 per month, the family maximum benefit would be about $3,400. The wife and children would receive half of the $2,000 up to $3,400 per month total for the family. He would get $2,000 while the wife and children would split the $1,400.

Along the same lines, Heywood said another strategy is for grandparents who adopt a grandchild. “The grandchild is eligible for child’s benefits when the adoption is final,” Heywood said.

Overlooked survivor benefits

Since the earliest age of retirement is 62, most people believe this applies to survivors as well, according to Donna Clements, a manager with Social Security and Medicare Services at Mercer. “A surviving spouse can receive benefits at age 60—assuming there are no eligible children,” said Clements. “This is two years earlier than for retirement and can be a major financial windfall, particularly if the surviving spouse did not work.”

Another overlooked benefit in the case of survivor benefits is this: A surviving-divorced spouse qualifies for a benefit if the marriage lasted at least 10 years, according to Clements. “The benefit is the same as the current surviving spouse but is not included in the family maximum, unless the benefit is based on caring for the worker’s eligible child. If the surviving-divorced spouse remarries before age 60, benefits aren't payable unless (and until) the subsequent marriage ends. Remarriage after age 60 does not stop entitlement to benefits.”

Overlooked criteria for disability benefits

To receive disability benefits, Clements said the worker needs to have earned a minimum number of credits based on their year of birth with some credits earned in recent years. In 2012, one credit is received for each $1,130 earned in covered Social Security employment, up to a maximum of four credits per year, she noted. “For example, if you retired at age 50 with a company pension and then became disabled seven years later; you would not be able to receive Social Security disability benefits because you have not earned enough recent credits,” Clements said. “You would need 20 credits within the last 10 years and this person would only have 12 credits.

Another one is this: “A non-working spouse that becomes disabled is not eligible for disability benefits based on their spouse’s work record,” said Clements. “Workers are eligible if they have earned a minimum number of credits based on their own earnings from Social Security covered employment.”

Two spouses, one worker

Epstein said another quirk is that more than one spouse can collect on a worker’s benefits. “A divorced spouse who was married for 10 years or more is entitled to collect on an ex-spouse’s benefit,” she said. Of course, there’s a catch: In most cases, you cannot be remarried.

Epstein said the earliest a spouse can collect on his or her former spouse’s work record is the age of 62. “If the ex-spouse applies for benefits before his or her full retirement age, the benefits will be permanently reduced,” she said. “Spousal benefits end when the worker dies unless the ex-spouse is taking care of children under the age of 16 who belong to the worker or are eligible for benefits because of a disability.” In this case, survivors’ benefits will be possible for the ex-spouse and the children, she noted. What’s more, the ex-spouse may be eligible for widow or widower’s benefits after the ex-spouse dies.

Bottom line: “Someone who has been married to more than one person for at least 10 years and is now unmarried or a widow or widower, can collect survivor’s benefits on the ex-spouse who has the highest earning work record,” Epstein said. “Each person can only get one check.”

So if there are multiple marriages, the person must pick which work record on which they want to collect. Obviously, they want to pick the work record that will get them the largest check. If a person remarries before the age of 60, they can’t collect on an ex-spouse’s record unless that second marriage also ends in divorce or from death of the second spouse. The one exception is a divorced spouse who is collecting disability benefits can remarry as early as age 50 and still collect survivor’s benefits.

File and suspend

If you are at your full retirement age (FRA), you can continue to work and suspend your benefit so your current spouse can collect a spouse’s benefit and you can earn delayed retirement credits (DRCs), said Clements. “The voluntary suspension is only for the months beginning after the month the request is made. A current spouse cannot claim a benefit on the worker’s record until the worker has applied.”

Andy Landis, owner of Thinking Retirement and the author of “Social Security: The Inside Story, 2012 ed.”, posed this question: Did you know you could apply for Social Security at 62 and draw four years of Social Security payments, and then suspend your payments at age 66?

“A handful of people know you can apply at 66 and immediately suspend your payments, which allows your spouse to file on your record,” he said. “But you can also suspend payments already in force, any time from age 66 to 70. Why? The win is that while suspended, your eventual payments are growing in the background at 8% per year.”

Claim spouse’s benefit now and worker’s benefit later

It’s not as quirky as other tactics, but it’s well worth mentioning for those who might be unfamiliar with this one: If you are married and attained FRA, you can claim a spouse’s benefit and then switch to a benefit based on your own work record at a later date, according to Clements. “This allows a person to collect a spouse’s benefit now while earning DRCs up to age 70 on their own work record,” she said. “People that are younger than FRA aren't allowed to do this.

She gave this example: A husband and wife are both at FRA, age 66, and have covered Social Security earnings. The husband’s monthly benefit is $1,400, and the wife’s monthly benefit is $1,000. The husband files for benefits. The wife can now claim a spouse’s benefit of $700 (50% of her husband’s benefit) and continue working and contributing toward her own Social Security benefit. At age 70 she files for her own retirement benefit that has earned DRCs and is $1,320 a month. Her spouse’s benefit stops and her higher retirement benefit amount starts.

Parent benefits

If parents have been receiving one-half support from a child for the 12 months prior to his or her retirement, they can receive a benefit on the child’s account at age 62, according to Heywood. “Not too many of these around anymore because most people have worked or are covered as a spouse for a higher benefit,” Heywood said.

Though it happens rarely in reality, a variation on this quirk is this. A parent can collect on a child’s work record if the child is deceased, said Epstein. “The parent would have to show they were dependent on the child,” she said. “Once the dependent parent reaches the age of 62, he or she can apply for benefits on the child’s work record if the child is deceased.”

The start-over

If you are already receiving Social Security retirement benefits, Clements said you can start your benefit over within 12 months of the first month of entitlement and limited to one withdrawal. “You can file a ‘Request for Withdrawal of Application,’ or Social Security Form 521, and your benefits stop immediately when you file,” she said. “The SSA will tell you how much you are required to pay back including any family members that received benefits based on your work record. After your repayment, you would reapply for benefits. The advantages of doing this are your monthly benefit amount will be higher based on your current age and the SSA does not charge interest on the repayment.”

Gimmicks undermine Social Security

For the record, there are those who aren’t so fond of claiming strategies that are gimmicks or abuses of the system. “I was always on the lookout for unique claiming strategies, in part because I’m fascinated by the financial aspect of claiming strategies, but also so I could suggest reforms if there was a strategy that seemed unfair and more of an abuse or gimmick,” Jason Fichtner, who is now a senior research fellow at the Mercatus Center at George Mason University and formerly acting deputy commissioner at the Social Security Administration.

Fichtner noted, for instance, that the SSA limited the ability to get an interest-free loan from the government via the so-called “do-over” strategy a few years ago, when he worked for the government.

What’s more, Fichtner was quick to say that Social Security is intended to be “insurance,” which is why it’s called the “Old-Age and Survivors Insurance” program. “It was never intended to be the sole means for people to live off of in retirement,” he said. “It’s insurance against the possibility that you’ll run out of saving by living too long.”

While we often don’t discuss the three-legged stool enough anymore, Fichtner said there’s a personal responsibility aspect to the program where individuals are supposed to have some personal saving. “Gimmicks that treat Social Security as a lottery where big bucks can be won not only negatively affect the solvency of the program but also undermine the societal support for Social Security.”

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