We talk to our clients a lot about Social Security, with topics ranging from reassurance that the system will continue to exist (it will, though younger clients might see a reduction in currently stated benefits) , to when to claim benefits in order to optimize the lifetime amount the client household receives from the program.
The easiest way to maximize your benefit is to wait to claim it: while people can claim Social Security as early as age 62, doing so results in a pretty significant reduction to the amount they can receive at their Full Retirement Age (FRA; the age at which someone becomes entitled to full benefits. For people born between 1943 and 1954, FRA is age 66.). And each year you wait to claim your benefit between your FRA and age 70, your benefit goes up by 8%.
There are other ways to increase how much a family might receive from Social Security, based mainly on the ability to claim benefits based on the work record of another person. The two most common examples are spousal benefits and survivor benefits. With the former, a spouse may be entitled to up to 50% of a primary worker’s Full Retirement Age benefit. With the latter, widows or widowers may be entitled to up to 100% of a primary worker’s benefit.
But few people realize that Social Security will also pay benefits to dependent children, as well as spouses who are caring for those children. To qualify, children need to be unmarried and under the age of 18 (or 19 if they are still full-time high school students). Disabled children over the age of 18 may qualify if the disability occurred before their 22nd birthday. As people are having children later and later in life, either naturally or through adoption, Social Security benefits for dependent children are becoming more and more prevalent.[i]
Each qualified child is eligible for up to 50% of the primary worker’s full retirement benefit amount. A spouse caring for qualified children can also receive a 50% benefit until the children reach age 16, without any penalty for claiming early.[ii] In order for these benefits to kick in, however, the primary worker must have filed for benefits.
So how does this work in practice? One of our clients is in his mid-60s, and he and his wife have two adopted two children (ages 14 and 9). The husband is approaching his 66th birthday, when he will reach Full Retirement Age. He is still working and plans on doing so until age 70, so the idea of claiming Social Security before then never entered his mind.
But a feature of Social Security allows someone at Full Retirement Age (the husband, in this case) to file for benefits and then suspend any receipt of those benefits. This accomplishes two things: first, it allows his wife and children to claim their dependent benefits. And second, by suspending receipt of his own benefits, the husband allows his benefit to grow 8%/year until his age 70.
In this case, the husband’s benefit at Full Retirement Age was $2,456/month. Assuming that his wife doesn’t work, she and both children would be eligible for a benefit of $1,228/month, for a combined $44,208/year, until the oldest child reaches age 18 in 4 years. And even if his wife does work and earns so much as to have her dependent benefit reduced to zero, the children’s combined benefit would amount to a little over $29,000/year. What’s more, those benefits will receive cost of living adjustments each year, just like the benefits of any other Social Security recipient. “Found” money like this is the sort of thing that can help tip the scales of a financial plan from not working to succeeding with flying colors.
This kind of “outside the box” thinking is par for the course for clients at Woodward Financial Advisors, where we combine a comprehensive approach to financial planning with ongoing investment management. If you have questions about your own Social Security situation, please to let us know!
[i] Something to keep in mind is that the Simpson/Bowles National Commission on Fiscal Responsibility and Reform has called for the elimination of the Social Security provision that pays benefits to minors with older parents. Stay tuned…
[ii] If the spouse works and is under Full Retirement Age, their Social Security benefit will be subject to the earnings test, where $1 of benefit payments are deducted for every $2 they earn above the annual limit. For 2013, the annual limit is $15,120.