4 ways to win at Social Security

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Like lots of other things related to money and the government, Social Security is devilishly complex. One of the best minds unraveling its mysteries is Mary Beth Franklin, a contributing editor to Investment News, a magazine for financial advisers.

Franklin just wrote a book that’s mostly aimed at her professional readership, but “Maximizing Your Clients’ Social Security Retirement Benefits,” is also full of good information for anyone who is interested in getting the most from this program.

Anyone on the verge of retirement should think about these four basics from the book before signing up to collect Social Security.

The payoff for waiting until 70 is big. If your full retirement age is 66, waiting until age 70 to claim gives you an additional 8 percent a year. Franklin offers this illustration: If your benefits are $2,000 a month at age 66, they will grow to $2,640 a month by the time you are age 70. Here’s how the math works: $2,000 multiplied by 1.32 percent. On top of that, Social Security will tack on annual cost-of-living adjustments, or COLAs.

Increase for delayed retirement

Year of birth Yearly rate of increase Monthly rate of increase
1933-1934 5.5% 11/24 of 1%
1935-1936 6% 1/2 of 1%
1937-1938 6.5% 13/24 of 1%
1939-1940 7% 7/12 of 1%
1941-1942 7.5% 5/8 of 1%
1943 or later 8% 2/3 of 1%

Source: Social Security Administration

Collecting Social Security at 62 while continuing to work is probably a bad idea. If you are younger than 66, for every $2 you earn over $15,480 in 2014, Social Security will hold back $1 of your benefit. For instance, if you collect $1,250 a month in Social Security benefits at 62 for a total of $15,000 this year, and you continue to work, earning $40,000 by year end, you’ll make $24,520 over Social Security’s earnings limit. To compensate, Social Security will withhold your benefits for the first 10 months of the year — in this example, $1,250 x 10. Any excess amount withheld will be refunded in the following year.

You won’t be able to hide. If you don’t tell Social Security you are working, it will discover the overpayment after your income taxes are filed and demand that you pay up.

Benefits aren’t lost forever. In the example above, assume that you lost 24 months of benefits over four years of collecting Social Security while working. Once you reach full retirement age — when the penalty for working and collecting goes away — Social Security will recalculate your benefit amount so that you’d end up getting the same benefit you would have gotten had you initially waited to collect until you were 64. Some might argue that this strategy has a very small penalty, but Franklin points out that if you choose this route, the rewards are small and you lose the ability to take advantage of some other claiming strategies that can help you maximize benefits way beyond anything you might have gained.

“File and suspend” can insure against delaying too long. File and suspend means that at full retirement age, you file for Social Security benefits, but then you immediately tell Social Security you don’t want to receive them. Instead, you ask to suspend your benefits and wait to take them later. By filing and suspending — as opposed to just waiting — you can request a lump sum payment of all the benefits that were due you during the period of suspension.

Why would you want to do this? Franklin offers this example: At 66, you are feeling healthy and plan to wait to collect until age 70. Nevertheless, you file and suspend your benefits. Four years later, just as you are ready to collect, you come down with terminal cancer. Because you filed and suspended, you can request a lump-sum payout beginning on the date that you first suspended your benefits.

This lump sum can be a significant amount of money. Let’s assume that at full retirement age, you were entitled to get $2,640 a month. By filing and suspending, and then asking for a lump sum payout at age 70, you would get $126,720 (or $2,640 x 12 months x 4 years) plus COLAs. That’s a nice nest egg to use to pay medical bills or leave to your heirs.

If you want to change your mind, you can. If you claimed at 62, but now you regret it, once you reach full retirement age — 66 — you can voluntarily suspend your benefits without paying anything back, and wait until you turn 70 to collect Social Security again. At 70, you would receive 99 percent of what you would have gotten if you had waited to collect at age 66.

The math works like this, Franklin says: 75 percent (reduced benefits at 62) x 1.32 (delayed retirement credits through age 70) = 99 percent.

If just thinking about this makes your eyes cross, you’ll probably want to get some expert assistance to help you understand these options and decide whether they are good ideas for you.