For many retirees, Social Security retirement benefits are their only source of fixed income once they stop working. As retirement approaches, people start thinking about when they should apply for these benefits. Full retirement benefits are available at full retirement age, anywhere from age 65 to 67, depending on when the applicant was born. According to information from the Social Security Administration (SSA), a person can apply as early as age 62 and receive about 25% less than the full retirement benefit, or he or she can delay receiving benefits until age 70 and get an amount greater than the full retirement benefit. If you're approaching the age where you'd like to start receiving your benefits, read on to learn how to make those dollars grow.

What's Available?
Social Security retirement benefits are available to retired workers, their spouses as spousal benefits, and to spouses and children in the form of survivor benefits. These benefits are based on a retiree's Social Security earnings record and age at the time the benefit amount is established. (To learn more, see How Much Social Security Will You Get?)

If you're looking to tap into your Social Security benefits, there are some little-known strategies available that may help you decide when you or your spouse should apply. There are pros and cons to each opportunity and what may work for you may not work for your neighbor. However, one of these options may enhance the Social Security retirement benefits for you and your family. (For the basics on Social Security, read Introduction To Social Security and Ten Common Questions About Social Security.)

1. Claim Now and Claim Later
Under certain circumstances, retirees can receive early retirement benefits at age 62, repay the amount received at a later date and then reapply for a larger monthly benefit. This strategy amounts to receiving a zero-interest loan from the government. According to the SSA, a benefit recipient can rescind his or her claim, pay back all benefits received (without interest), and then reapply for benefits based on the current age of the recipient.

With this strategy, not only can a person use the benefit payments, but upon repayment, he or she can either claim a tax refund or credit for any taxes paid on the benefits received. This approach requires the repayment of what may be a substantial sum of money, but the advantages to this strategy include the opportunity to invest the benefit payments and retain or use the earnings, as well as the receipt of increased monthly benefits upon reapplication. (To learn more about tax returns and credits, see The Saver's Tax Credit: An Added Incentive to Fund Your Plan and our Income Tax special feature.)

Example - Claim Now and Claim Later

Let's say George retires and applies for early benefits at age 62 and gets a monthly benefit payment of $1,500. By the time he reaches the full retirement age of 66, his benefit would be about $2,185. At age 70, his monthly check would be $2,970 after factoring in delayed retirement credits (about 8% added to his full retirement benefit each year between full retirement age and age 70). At age 70, George could repay about $156,000 in benefits received (including projected cost of living increases), and then reapply and receive essentially an annuity payment ($2,970) for the rest of his life or for the joint lives of George and his spouse - a monthly benefit amount that's almost twice what he was getting at age 62.
By comparison, an immediate payment annuity from an insurance company that paid the same monthly benefit at age 70 would cost more than $400,000. In addition, if George invested the early benefit payments at an average annual interest rate of 5%, he'd have earned almost $30,000. Thus, he can get tax-free money from the government, which he can use and invest as he pleases, and then if he chooses, he can repay it without interest, in exchange for increased monthly payments for the rest of his life.

The downside to this strategy is that the retiree and/or his spouse may not live long enough to recoup the lump sum pay-back to Social Security. In the example above, George would have to receive benefits after age 70 for about 4.5 years, assuming a 2% cost of living adjustment (COLA) each year. Also, when he rescinds his benefits, he'd have to pay for Medicare Part B out of pocket as Social Security will not make payments for him until he begins to receive benefits again. Finally, it may take a while for the SSA to begin making payments to George again after he reapplies, so he may have to go a few months without a benefit check. However, if George an average or above-average lifespan, the total benefits he will receive will be significantly greater using this strategy. (For more on Medicare, see What Does Medicare Cover? and Getting Through The Medicare Part D Maze.)

2. The Two-Claim Approach
A strategy that may benefit two working spouses involves one spouse claiming spousal benefits at full retirement age while continuing to work and accumulating higher retirement benefit credits for his or her own account. Often, one spouse may decide to retire at full retirement age while the other spouse continues working past full retirement age. In this case, it may make sense for the retired spouse to claim full retirement benefits, while the working spouse files for spousal benefits but continues to work. The advantage of this plan is that the working spouse gets spousal benefits equal to one-half of the retired spouse's full retirement benefit (provided the working spouse is at full retirement age) while the working spouse's future benefit continues to increase until age 70. (Keep reading about the benefits of marriage in The Tax Benefits Of Having A Spouse.)

For recipients born between 1943 and 1954, delaying benefits past age 66 (full retirement age) adds 8% per year. In four years, at age 70, the benefit is about 132% of the full retirement benefit. For this strategy to work, each spouse must have reached his or her respective full retirement age before claiming benefits. When the working spouse reaches age 70, he or she can claim increased benefits in lieu of spousal benefits.

Example - Two-Claim Approach
For example, let's say that a husband and wife are about the same age, both born in 1943. The husband retires at full retirement age (66) and files for Social Security monthly retirement benefits of about $2,196. The wife then files for spousal benefits and receives almost $1,100 per month (almost $3,300 per month combined). She continues to work until age 70, and then claims monthly benefits of about $2,898 (increased by delayed retirement credits). By comparison, the wife could have claimed her full retirement benefits at age 66 ($2,196). However, by claiming only her spousal benefits ($1,100), she is able to claim a larger benefit ($2,898) at age 70.

Does this strategy make financial sense? It may if you plan on living at least to your full life expectancy. Based on the hypothetical numbers from the example, both spouses would have to live about 81 years for the total accumulated benefits received using the spousal option to exceed the accumulated benefits of both claiming benefits at full retirement age.

3. Claim Early - Claim Late
Another strategy can be applied if one spouse wants to retire early and collect permanently reduced benefits while the other spouse continues working. What if the retired spouse is older than the working spouse? Here's where the working spouse can take advantage of the age difference and earn delayed retirement credits on his or her own full retirement benefit.

Example - Claim Early - Claim Late Strategy
Let's say, Denny, who is four years older than his wife, Clara, retires at age 62 and makes a claim for reduced benefits, while Clara continues to work. At her full retirement age, Clara will make a spousal claim for benefits, which will equal 50% of the retirement benefit that her husband would have received based on his age at the time she made her claim, or in this case, his full retirement benefit. In this way, even though Denny's collecting a reduced benefit, Clara can get half of her husband's full retirement benefit. At age 70 she can forgo the spousal benefit and receive her full retirement benefit, enhanced by delayed retirement credits. This strategy gives the Clara the chance to collect Social Security retirement spousal benefits while she continues to work and increases the size of her own benefit.

Of course, the wife in this scenario could choose to collect her full retirement benefit instead of the spousal benefit. Again, similar to the two claim approach, the risk she runs in taking spousal benefits instead of full retirement benefits is that she may not live long enough to recoup the difference between the benefit amounts. However, if Clara expects to live well past average retirement, the increased benefits she'll receive after age 70 can significantly add to her retirement income.

4. Suspend Claim for Spousal Benefit
Similar to the claim early - claim late approach, one spouse may want to work past full retirement age, and allow his or her retirement benefit to grow with delayed retirement credits. If the non-working spouse has little or no retirement benefits available, he or she can still apply for spousal benefits.

To be eligible for maximum spousal benefits (50% of the working spouse's benefit) both spouses must be at full retirement age, and the working spouse also must have filed a claim for benefits. After both spouses file their respective claims for benefits, the working spouse can suspend his or her claim. In this way, the non-working spouse receives full spousal benefits while the working spouse defers his or her own benefits, increasing their future value. Again, anytime a retiree defers full retirement benefits for enhanced benefits based on delayed retirement credits, he or she must live long enough to recoup the difference.

Social Security retirement benefits can be an important part of any retirement income plan. Knowing the different options available can provide you with a greater chance of maximizing your benefits. Deciding which choices work best for you requires careful consideration. Weigh the benefits against the potential disadvantages in light of your particular circumstances.

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