Strategies to Maximize Social Security Retirement Benefits

May 16, 2013
Edward A. Zurndorfer, Certified Financial Planner

The majority of the federal employee workforce is covered by the Federal Employees Retirement System (FERS). One of the three components to the FERS retirement is Social Security. Since most federal employees at some point after they retire from federal service will elect to receive their Social Security retirement benefit, this column will present three strategies for employees — particularly FERS employees — to maximize their Social Security retirement benefit. The first two strategies apply to all employees; the third strategy applies to married and divorced employees.

1. Delay Claiming One’s Benefits For As Long As Possible, Possibly to Age 70

Social Security retirement benefits can be claimed as early as when an individual is age 62. But claiming benefits at age 62 will result in a permanent reduction to one’s benefits. For example, anyone born between 1943 and 1954 will get a full Social Security retirement benefit — their primary insurance amount (PIA) – at age 66. If that same individual claimed their benefit at age 62 their retirement benefit would be permanently reduced by 25 percent of their PIA. For every month the individual waits beyond age 62 to start receiving their Social Security retirement benefit, their benefit will increase by a fraction of one percent. Furthermore, for each year an individual delays claiming benefits past the year they become full retirement age (FRA) and until age 70, the individual’s benefit will increase by 8 percent per year (“delayed retirement credits”). Consider the following example.

Kirk, age 62, finds out by reading his current Social Security statement (downloadable at that his PIA at age 66 (his FRA) is $1,500 per month. If Kirk elects to start receiving his benefit this year at age 62, he will receive $1,125 (75 percent of $1,500). If he delays the start of his benefit until age 70, he will receive $1,980. The difference between what Kirk will receive at age 62 ($1,125) and age 70 ($1,980) is $855 per month, or 76 percent more of a monthly benefit at age 70 compared to the monthly benefit at age 62.

Delaying Social Security benefits makes good sense if an individual has a guaranteed (defined benefit plan) pension such as a CSRS or FERS annuity. It also makes sense to delay benefits if an individual works past age 62 and their income will spike during their last years of work. This is because an individual’s benefit is calculated based on their highest 35 years of Social Security wages. Any year with no Social Security wages will factor in at zero and will be averaged into the calculations, as discussed next.

2. Maximize Work Credits

An individual’s Social Security benefit is based on their 35 highest years of Social Security wages. Although an individual needs only 10 years worth of minimum Social Security wages (40 credits) in order to qualify for a Social Security retirement benefit, individuals should attempt to maximize the amount of their Social Security wages for all 35 years. Also, one should not “slack off” in their later years of working. This could significantly lower the average 35 years of Social Security wages. In fact, an individual can continue working after starting to receive Social Security benefits. But between age 62 and the year an individual becomes FRA, a Social Security recipient can earn only up to a certain amount without losing any of their benefits (Social Security “earnings” test). For example, during 2013 an individual between ages 62 and 66 drawing Social Security retirement benefits can earn up to $15,120 without losing benefits.  Above $15,120, their benefits will be reduced by 50 cents for each dollar earned above $15,120. For anyone reaching FRA during 2013 (they were born during 1947), they can draw their Social Security benefit and work provided that up until the month they become FRA in 2013 they earn no more than $40,080. For every three dollars earned above $40,080, their Social Security benefit is reduced by one dollar. After an individual reaches FRA, any amount earned will not affect their Social Security benefit. Also, the earnings penalty is not permanent. Once an individual reaches FRA, their benefit will be recalculated to give the individual credit and an enhanced Social Security retirement benefit as a result of continuing to work.

3. Strategies For Married and Divorced Individuals

When it comes to married couples, it is typically the lower earning spouse who collects a “spousal” benefit, which is equal to 50 percent of the higher earning spouse’s Social Security benefit. But there is nothing in the law preventing the higher earning spouse to opt for a “temporary” spousal benefit. But as will be explained, in order to employ this strategy, the higher earning spouse must have reached their FRA.

Here is how the strategy works:

Suppose the higher earning spouse reaches FRA this year (age 66, born during 1947). This spouse wants to delay receiving their own Social Security benefit until age 70, which, as a result of four years’ worth of delayed retirement credits, will be 32 percent larger compared to what the benefit is at FRA. But in the meantime, the higher earning spouse can bring in extra money by applying for half of the other spouse’s (lower) Social Security retirement benefit.  The lower earning spouse would have to apply for their benefit in order to allow the higher earning spouse to apply for half of the other spouse’s benefit.

Suppose the lower earning spouse is 62 and applies for benefits. He or she will get 75 percent of his or her benefits because of applying for the benefit before FRA. At that point, the higher earning spouse can apply for a spousal benefit. Since that spouse has reached FRA, the spousal benefit will not be 50 percent of the other spouse’s reduced benefit but will be 50 percent of the lower earning spouse’s full benefit at the lower earning spouse’s FRA. This is because the higher earning spouse has reached FRA.

This strategy is known as “restricting an application” for a spousal benefit only. The higher spousal earner must have reached FRA. If the higher spousal earner is younger than FRA, then the Social Security Administration will automatically give that spouse the highest benefit that spouse is entitled to, which is most likely the benefit based on their Social Security earnings. In short, if a spouse starts taking Social Security benefits before reaching their FRA, then they do not have a choice as to which benefit (their own benefit, or half of their spouse’s benefit) to take. Note that any time before the higher earner spouse reaches age 70, he or she can switch to their own higher benefit. At that point the lower earning spouse can switch to a higher spousal benefit, although that benefit will be reduced because the lower earning spouse started his or her own benefit before he or she reached FRA. But the survivor benefit for the lower earning spouse will still be 100 percent of the higher earner spouse’s benefit if the higher earner spouse dies first.

A divorced individual is entitled to a spousal or a survivor benefit based on the former spouse’s record. To be eligible, the individual must have been married to the former spouse for at least ten years, been divorced for at least two years, and be at least age 62 to receive a spousal benefit. If the ex-spouse dies, then the surviving ex-spouse can claim a full survivor benefit as early as age 60.

The Social Security rules for divorced couples are almost the same as for married couples. For example, one ex-spouse at his or her FRA can collect half of the other spouse’s benefit. Also a survivor benefit is 100 percent of the deceased ex-spouse’s benefit if the surviving ex-spouse waits until FRA to start collecting.  But there is one important difference between married couples and divorced couples when it comes to Social Security benefits and that is with respect when one ex-spouse can collect half of the other ex-spouse’s benefits. Even if the ex-spouse to whom the other ex-spouse is drawing has not applied for benefits, the other ex-spouse may be allowed to collect benefits. To qualify, both ex-spouses have to be at least age 62 and have been divorced for at least two years.

Divorced women in particular can use the “restrict an application” strategy (see above) to maximize their own benefit which can be a boon for those women trying to enhance their retirement savings. For example, suppose a woman’s own Social Security benefit with delayed retirement credits will be larger than her ex-husband’s Social Security benefit. At her FRA, she takes her ex-husband’s Social Security benefit and she continues to work. At age 70 she switches to her own Social Security benefit, which could be as much as 32 percent larger compared to her benefit at FRA.

Posted:  05/16/2013

About the Author

Edward A. Zurndorfer is a Certified Financial Planner, Chartered Financial Consultant, Chartered Life Underwriter, Registered Health Underwriter, Registered Employee Benefits Consultant and Enrolled Agent in Silver Spring, MD — and the owner of EZ Accounting and Financial Services, an accounting, tax preparation and financial planning firm also located in Silver Spring, MD.  Zurndorfer is also is an instructor at federal employee retirement seminars throughout the country and writes numerous columns and books on federal employee benefits.