The Independent Investor: How to Make the Most Out of Social Security

Yes, it's complicated. Social Security benefits have been around since 1935 and, like taxes, have become increasingly complex through time. Most people are losing out because they don't understand the fine print. Starting today, you will, so read on.

For most of us, who haven't saved a great deal during a lifetime, Social Security benefits are about all we can depend on once we retire. In 2013, almost 58 million Americans received these benefits. Retirees and their dependents accounted for 70 percent of benefits paid, 19 percent went to disabled workers and dependents while survivors of deceased workers accounted for 11 percent of the total.  Although benefits have increased numerous times since its creation and those benefits are inflation-indexed, the total doesn't come to much, so wringing every last penny out of the program is essential.

In past columns, I have explained that if you can, waiting until you are 70 years of age is your best bet as far as receiving the most money from Social Security. If you defer filing at age 62 (your earliest allowable retirement dates) until age 70, the difference is over $100,000 per person. That's a nice piece of change for retirees. Of course, the downside is that if you die at age 71, then retiring early would have been a better bet. The healthier you are, the more sense it makes to retire later.

There is also an opportunity for married couples to enhance their combined benefits. It is called "file and suspend." It works best if one spouse is making significantly more than the other. The bigger the income gap, the bigger the payoff. Hypothetically, let's say my wife and I are now 66 and debating on whether to tap Social Security since we are both at full retirement age (FRA). Assume my wife, Barbara, as president of the company, has been the real bread-winner and has earned more than me over the years. She can expect to receive $2,000 per month in benefits, while I get $900 a month.

If Barbara files for benefits under her earnings record, I could claim one-half of her benefits ($1,000). At the same time, I could let my benefits continue to increase (by as much as 32 percent if I wait until I am seventy) before claiming them. That's a great deal for me since I make $100 more a month and let my benefits ride. But what happens to Barbara's benefits under this scenario?

As soon as I claim my spousal benefit, Barbara can turn around and immediately suspend receipt of her own benefits of $2,000/month. By doing so, we can now both accumulate the 32 percent increase in benefits until age 70. In dollars and cents, Barbara's benefits will grow to $2,640 a month and mine will top out at $1,188. But in the meantime, as the claiming spouse, I still receive $1,000 a month until age 70.

If we both live to say, 95, the file and suspend strategy would result in more than $200,000 in extra benefits between us. Not a bad return to simply spend an hour or two of additional form filing. There is an added benefit as well; since it would allow me to take a survivor benefit on Barbara's increased monthly amount should she die unexpectedly after age 70. Complicated? Yes, but well worth the time and effort.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.