BOSTON -- The Social Security Administration recently put the kibosh on a technique some retirees were using to boost their monthly benefits. But even though that loophole is essentially closed, experts say there are still plenty of ways households can legally maximize the amount of income they receive from Social Security.
In December, the SSA said retirees essentially can no longer do what are called do-overs, or the free-loan strategy. Here's how it worked: You claim benefits at a given age and then years later repay what you received, pay no interest, and then file for benefits again, getting a higher monthly amount because you delayed filing until a later age.
"This strategy is equivalent to a 'no interest' loan from Social Security," said Boston College's Center for Retirement Research.
Not many folks used this strategy, but the Center for Retirement Research estimated the do-over tactic could cost Social Security an estimated $6 billion to $11 billion per year. Under the new rules, you can suspend and re-apply for your benefit only within the first 12 months of applying for Social Security, and you can only do it once in your lifetime.
Now truth be told, many experts didn't like this tactic. "I was never a fan of the repay-and-reapply method anyway," said Elaine Floyd, certified financial planner and director of retirement and life planning at Horsesmouth LLC. "To take a permanently reduced benefit with the hope of cancelling it and raising it later was just too risky in my opinion, especially after the Center for Retirement Research at Boston College estimated the cost to the system if everybody did it. It was a loophole just waiting to be closed."
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Others agreed, including Jason Fichtner. He is now a senior research fellow at the Mercatus Center at Georgetown University but while he was acting deputy commissioner for the SSA, Fichtner started the push to remove the do-over option. "It was never meant to be a financial strategy for the wealthy to game the Social Security trust funds," Fichtner said.
The do-over approach had its origins in the case of a woman "who initially claimed benefits in 1957 and later requested that she be allowed to re-file in 1964 in order to obtain a higher monthly benefit based on her more recent work history and older filing age," according to the Center for Retirement Research. "The SSA granted this request on the grounds that it was in the best interest of the claimant to rescind the original claim. It was not specifically intended to allow zero-interest loans, but instead to allow for the possibility that changes in an individual's circumstances could cause her to reconsider an earlier claiming decision."
So, if you can't use the do-over tactic any longer, what's left? There are a few options, said Dennis Heywood of consultancy Social Security Solutions, but the choices available depend on whether a married couple includes one wage earner or two, the ages of each spouse, and when a wage earner reaches full retirement age.
"And most importantly, how an option fits into a person's financial portfolio," Heywood said. "My experience is that many people are taking their Social Security at an early age to preserve investments as they age. Social Security replaces what they would take out of investments to live on."
Said Fichtner: We don't know the best age for you to claim Social Security. Only you do."
WORK LONGER, EARN MORE: Your earnings record for Social Security continues to be updated as long as you work and pay into Social Security, Floyd said. "If you keep working at a relatively high salary, it can cause one of your lower-earning years to drop off the 35-year earnings record and serve to boost your primary insurance amount, or what's called your PIA."
This advice, she said, is especially important for people who do not have 35 years of high earnings, such as women who have stayed home with their children. "It even applies to high-earners in their 50s and 60s. Although the earnings in their early years are indexed for inflation, the indexed amount is likely lower than their current salary," said Floyd.
DELAY APPLYING: Most people claim Social Security as soon as they become eligible, at age 62. But the benefits of waiting to apply for benefits cannot be underestimated. Consider it this way: If you claim early, at age 62, your benefit is reduced by 25 percent for your lifetime. But if you wait until age 70, you'll get a 32 percent increase in your benefit, said Fichtner.
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"In today's low-return environment, those 8 percent annual delayed credits that an unclaimed benefit earns between the ages of 66 and 70 end up being extremely valuable," Floyd said. "Most people consider their 'break-even age,' or the age at which the cumulative total under the later-claiming scenario catches up to the earlier-claiming scenario. But this usually leads to earlier claiming behavior because people don't want to start out 'behind.' "
Fichtner agreed that looking at the break-even age doesn't apply, especially when so many people are living beyond the break-even age. If you apply for reduced benefits at age 62, you'd be ahead for 14 years. But after age 76, you wouldn't. And today the average life expectancy for someone age 62 is about 83 years old.
For her part, Floyd said it's better to consider the relative income in your old age, when you are 85 or 90. For example, the age-85 monthly benefit for a maximum earner born in 1946 will be $3,320 if he applied at age 62 versus $5,844 if he applies at age 70, assuming 2.8 percent annual cost-of-living adjustments, she said.
"The bigger risk for baby boomers is not dying too soon and leaving money on the table; it's living too long and having insufficient income in your later years when you really need it," Floyd said.
Fichtner agrees that most people should consider delaying. "People should hold off claiming Social Security retirement benefits, regardless of whether or not they continue to work, until they actually need them," he said. "The longer people wait, up until age 70, the greater their monthly benefit amount. Obviously, for those that need the income, they should take it then."
COORDINATE SPOUSAL BENEFITS: Married couples can do plenty to maximize their joint Social Security income, but they have to pay attention to the rules, said Floyd. For example, a high-earning husband can collect a spousal benefit off his wife's record between the ages of 66 and 70 while his own benefit earns delayed credits.
The Center for Retirement Research at Boston College calls this the "claim now, claim more later" strategy. But knowledge of the rules is essential, Floyd said. For it to work, three things must happen.
First, the wife must have applied for benefits on her own record, and if she is under full retirement age, this may not be the best move. Second, the husband cannot do this before he is full retirement age. Third, when the husband goes to his Social Security office, he must tell them he wants to restrict his application to his spousal benefit; otherwise they will pay him his own benefit, and all delayed credits will stop.
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MAXIMIZE SURVIVOR BENEFITS: One benefit of Social Security is that if one spouse dies, the other spouse may jump up to that spouse's benefit if it is higher, said Floyd.
The best way to get the most out of the survivor benefit is to have the high earner delay benefits to age 70, said Floyd. "This will maximize their joint income while both spouses are alive, and it will maximize the surviving spouse's income after one spouse dies."
Floyd also said that "applying before full retirement age is the worst thing a high earner can do, even if he is not expected to live very long."
Consider this example: Jack applies for Social Security at 62 and dies after receiving one check. His wife Jill's survivor benefit will be based on Jack's age-62 benefit. But if he dies without having applied for Social Security, her survivor benefit would be based on his age-66 benefit, which would be about 25 percent higher.
"It seems counterintuitive to advise a terminal patient age 62 to 66 not to file for Social Security so he can collect as much as possible while he's alive, but holding off will increase the spouse's survivor benefit," she said.
