Editor's note: New rules issued by the Social Security Administration that became effective on Dec. 8, 2010, limit recipients' ability to use the "do-over" strategy outlined below.
Social Security, which celebrates its 75th anniversary in 2010, provides retired workers, as well as widows, widowers, the disabled and some children, with a vital source of income. On average, people 65 and older depend on monthly Social Security checks for 40 percent of their income. Reliance on Social Security increases steadily with age.
Since every dollar counts in retirement, it makes sense to squeeze all the money out of Social Security to which you're entitled, right? Fortunately, there are legitimate ways to maximize your benefits. Here are four strategies that are worth considering, whether you count on Social Security income to finance a vacation every year or to put food on the table every day.
Wait to collect. The longer you wait to collect Social Security, the higher the benefits for the rest of your life. Almost three-quarters of Americans start collecting benefits before reaching full retirement age. Workers can begin collecting benefits as early as 62. That can be a mistake, however.
With long life expectancies and people relying more heavily on Social Security, it often pays for healthy individuals and couples to delay collecting benefits as long as possible. For every year you put off collecting between ages 62 and 70, you'll increase your benefit between 7 percent and 8 percent. If you can, consider tapping other retirement resources during those years.
File and suspend. This strategy applies to married couples, in instances in which there's a disparity between the earnings history of the spouses. When the higher-earning spouse reaches full retirement age, he or she applies for Social Security benefits and immediately suspends them. This can be done in the “remarks” section of the application.
Since the higher-earning spouse has filed for benefits, the lower-earning spouse can choose to receive a spousal benefit, which can be equal to up to one-half of the higher-earning spouse's benefit. The higher-earning spouse can continue to work or withdraw funds from retirement accounts, thereby delaying his or her benefits. This gives the higher-earning spouse the ability to draw a larger benefit later — up to about one-third larger if benefits are delayed from 66 (the current full retirement age) until 70.
Double-dip. Here's another strategy for married couples. It involves drawing your regular benefit and your spousal benefit at different times. This may mean collecting a lower benefit for a few years in exchange for receiving a higher benefit thereafter.
Here’s how it works. Let's say you're ready to begin collecting benefits at your full retirement age. You can either choose to receive your own benefit or your spousal benefit. Opt to receive your spousal benefit rather than your own, even though the spousal benefit is lower. By delaying the collection of your own benefit, it'll continue to grow. In this scenario, collecting a smaller benefit for a few years can result in receiving a much larger benefit later in life.
Keep in mind that this approach is permitted only for individuals who've reached the full retirement age. If you want to become a double-dipper, you must specifically request the spousal benefit when you file for benefits. Otherwise, the Social Security Administration (SSA) will assume you want whichever benefit is higher, be it your own benefit or the spousal benefit.
Take a do-over. Even if you've already started collecting benefits, it's possible to change your mind and start over. The advantage of doing so is that the amount of your monthly check should increase. That's especially true if you originally filed for benefits at 62 and you're now at or past your full retirement age. Remember, your benefits can increase up to 8 percent for every year you delay, up to age 70.
The downside to the do-over strategy is that the SSA requires you to pay back all of the benefits you received before you can withdraw your original Social Security claim and reapply. You'll need to have enough cash on hand to make the repayment. The SSA charges no interest on the repayment, however. If you're in poor health, think hard about starting over since you'll probably need a few years to fully reap the rewards of the higher monthly benefit.
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