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Thursday, August 30, 2012

Little-Known Strategies Could Boost Your Bottom Line

Increase your Social Security benefit.

With the economy in a tailspin and people having to work longer to make ends meet, it’s more important than ever to think through just how and when you claim Social Security benefits. You may be able to boost the amount you receive each month by employing two little-known strategies, described here.

These two approaches are available only if you’ve reached full retirement age—66, gradually increasing to 67. They are not widely used, so far. One reason is that most people begin claiming Social Security at the earliest eligible age, 62—before full retirement age—and that reality has spiked in recent months as people face financial pressure.

Mark Lassiter, spokesperson with Social Security, says these two strategies have been around a few years but not many people have used them. “They’re really just getting talked about in the past year,” he says.
If you or your spouse can hold off until full retirement age, the benefits may be significant.

1. Claim and suspend
If you’ve already started collecting Social Security but don’t need the money now, you can change your mind, thanks to a little-known provision called “claim and suspend.” That is, once you’ve claimed your benefits, you can turn around and suspend them for as long as you like. Claiming and suspending may add to your bottom line in three ways:
  • First, by signing up for Social Security, your spouse can also claim a spousal benefit, which typically is about 50 percent of yours. (The spousal benefit continues even if you suspend.)
  • Also, by suspending, then delaying your own benefit, the amount you’ll eventually receive each month continues to grow at 8 percent a year, until you’ve hit 70.
  • And, if you die first, the higher benefit is passed on.
Only Social Security recipients who are of full retirement age and have never collected early benefits can use the claim-and-suspend strategy.

2. Claim now, claim more later
This strategy works for married couples who claim benefits based on their own work record. If one of you has taken your benefit, the other can draw a spousal benefit, typically around 50 percent, even while continuing to work.

It works like this: If your husband (or wife) is receiving a benefit and you have reached full retirement age, you could claim a spousal benefit, rather than your own. You typically would get about half of what your spouse receives.

Meanwhile, your own retirement benefit continues to grow at 8 percent a year. When you reach 70 (when the amount no longer qualifies for the annual increase), you could switch from a spousal benefit to claim your own benefit, if it’s larger.

The purpose of the law
These strategies were included in the Senior Citizens Freedom to Work Act of 2000, passed to encourage people to continue working beyond their retirement age. One way to achieve that, explained Patricia Dilley, professor of law at the University of Florida and a former staffer on the House Social Security subcommittee, was to allow people to access some level of retirement benefits while they stayed on the job.
Other considerations
These approaches are not for everyone. First, they carry some risk. Most significantly, you need to live long enough to make waiting extra years to take your benefits worthwhile. Also, the benefit amount may affect your tax bill, so you may want to consult a tax attorney before signing on.

Critics say these strategies benefit people who are better educated, have higher incomes and may be able to work longer. And the fact that better-educated people are more likely to know about them in the first place undermines the goal of Social Security, which has been to provide a benefit available to society over all, says Alicia Munnell, director of the Center for Retirement Research at Boston College.

Finally, they offer greater benefits for married couples, notes Kathryn Garnett, a Seattle-based consultant in retirement planning. And many people with lower incomes, especially single older women, can’t afford to wait for higher benefits.

However, if you’re part of a couple with a modest or average income and you’re able to use these strategies, you’ll likely see a significant impact on your household finances, says David Yeske, a certified financial planner in San Francisco. “If you’re a professional making several hundred thousand dollars, the impact is trivial. But if your income is $50,000 and you bring in a spousal benefit, that could have a substantial impact on your household.”

It’s possible that Congress may change these rules down the road; although experts say that if you’ve already begun claiming benefits, it’s likely that you’d be grandfathered in.

Karen M. Kroll is a financial writer based in Minneapolis.

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