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3 Ways to Maximize Social Security Benefits

Understand the implications of your benefit choices, which additional benefits you may be eligible for, and when to claim, says retirement expert Phil Moeller.

3 Ways to Maximize Social Security Benefits

Christine Benz: Hi, I'm Christine Benz for Morningstar.com. What are some key rules to bear in mind when deciding how and when to claim Social Security benefits? Joining me to discuss that topic is the co-author of a new book about Social Security, Phil Moeller. The book is called Get What's Yours.

Phil, thank you so much for being here.

Philip Moeller: My pleasure.

Benz: First of all, congratulations on the book. Let's talk about the three rules that you lay out in the book--three rules to maximize your benefits. Let's start with the first one. It's something that people who have been following Social Security probably have heard, and it's to be patient. But let's go back over that; let's talk about the virtues of potentially delaying claiming Social Security.

Moeller: Absolutely. When we started researching the book, we found out that most people take their benefits at 62 or close to it, which is the earliest they can take benefits. As you know--and as I'm sure many of your viewers know--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, but what it does mean in our view--and I hope we expound upon it in the book--is that you really need to do your homework, you shouldn't just rush down to Social Security when your 62nd birthday is coming about, and you need to learn the rules of how you should claim your benefits. So, being patient to us, 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. So, don't be in too much of a hurry to claim the benefit right away.

Benz: So, people may have heard about the merits of delaying; you just outlined them. But let's talk about whether there any situations where it really may not make sense to delay--at least not until age 70?

Moeller: There are many situations for that. One of the ones that's most common which will still let you maximize your benefits is that spousal benefits don't get any higher if you wait until past full retirement age, which for most people is 66 these days. So, there is no reason to delay a spousal benefit past the age of 66; but we're fully aware, in some cases, people do need the money. 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: If you've retired and you have school-age children at home, they can claim a benefit based on your earnings record. So, if you're 62, you might have teenagers at home or even grade schoolers; but if you wait until age 70, they would be too old to claim benefits on your record at that point. So, it's not only your benefit that's at stake, but it could be benefits of multiple children. So, 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."

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Benz: So, [that makes sense] if you're the older parent of minor children. How about waiting past 70? There's no benefit to doing that, correct?

Moeller: No. And we get a lot of interesting questions, because people are worried about the tax consequences of all of a sudden having that benefit at age 70 raise their taxes. I've never been able to come up with a scenario where you end up with less money by taking the benefit at 70. And so, if people would like to send me their checks at age 70, I will happy to pay the taxes on them.

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." So, if we've been working, we are entitled to claim retirement benefits on our own work records, but there are other types of benefits you alluded to--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: Sure. It's sort of a mind-boggling array of opportunities and choices. So, you have your benefit, 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 record.

If you pass away, there are survivor benefits. There are also survivor benefits that may be eligible 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. That's the way Social Security works. So, there's a whole range of benefits.

The key thing to keep in mind is that you can't really take the full value of two benefits at once. So, 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. Now, the greatest example of that is spousal benefits, which we talk about at great length in the book. And the classic scenario, which the first chapter with Paul Solman is about, is to take your spousal benefit while your own retirement benefit grows by 8% a year between your full retirement age and age 70.

So, 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 some chance it'll be rescinded because it's been proposed that it's 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 now exist, and that's what we are telling people.

Benz: Exactly. Let's just briefly go over that scenario that you just mentioned--the so-called file-and-suspend strategy. Some of our viewers are probably familiar with this. They may have used it themselves. But in a basic situation where you've got a married couple, let's talk about how file-and-suspend works.

Moeller: In the classic situation, in order for spouse A to collect spousal benefits, spouse B has to have filed for their 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 Social Security and trigger your spouse's eligibility for spousal benefit but 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, while you can let your own retirement benefit grow by 8% a year. And we talk about this throughout the book; but in our third point, the timing becomes very important, and we strongly suggest people wait until their full retirement age to take the best advantage of the spousal benefit.

Benz: So, that's your third rule for managing your Social Security income stream: Get the timing right. Let's spend a little bit of time talking about that; as you say, there are obviously many permutations, but what are some of the key things that people should have in mind when timing [Social Security]?

Moeller: Sure. The most important thing is to understand what full retirement age means. It's a definition in Social Security; it's an age. It's 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. 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 trigger simultaneously a second benefit. For example, if you are below full retirement age and your husband has claimed, for example, his retirement benefit and you want to claim a spousal benefit and you are not 66, if you file for a spousal benefit, you automatically trigger your own retirement claim, which many people don't really want to do and they don't know. The reporting forms aren't totally 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. And when you claim early, you also are subject to what are called "early claiming reductions." So, if you claim at 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 do a book.

Benz: Right. 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 work, in terms of pension offsets and windfall programs that Social Security has. It's very complicated, and regardless of how long the book might ever have been, we get questions everyday that we haven't seen before. There are just a lot of combinations.

Benz: Phil, thank you so much for being here. Good luck on the book.

Moeller: Thanks. It's my pleasure.

Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.

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