I spend a lot of my time answering questions from
InvestmentNews readers about Social Security benefits. The other day, Jeff Young, an adviser in Scottsdale, AZ, asked about the benefit options for a client who was nearing his 66th birthday. The client's second wife is substantially younger and they have an 8-year-old child.
The question: Should the client claim his benefit at his normal retirement age of 66 so his minor child could also collect benefits or should he wait until age 70 to claim his maximum benefit, thus ensuring the largest survivor benefit for his young wife?
The answer: He can do both.
As long as he waits until his normal retirement age of 66, the client can tell the Social Security Administration that he wants to “file and suspend” his benefits. That means, he can file for benefits which will trigger monthly payments for his minor child, and he can immediately suspend his own benefit so he can collect a larger amount later. His benefit will increase by 8% per year for every year he delays collecting his retirement benefit up until age 70. That means his retirement benefit at age 70 will be 132% of what it would have been if he had collected at age 66.
But wait, there's more.
[More: How children can reap the benefits of Social Security]
Because his child is under age 16, the client's wife also can collect Social Security benefits. And it doesn't matter that she's just 40 years old. The minimum age requirements to collect retirement benefits (62) or survivor benefits (60) do not apply when it comes to collecting benefits as the caregiver of a young child.
The child's benefit, which is usually half of the parent's basic retirement benefit (not including any delayed retirement credits), will continue until age 18 (and up to age 19 if he or she is still in high school). The mother's benefit, also worth up to half of her husband's basic benefit, will stop when her child turns 16.
Together, the mother and child's benefit are subject to a family maximum amount, which can range from 150% to 180% of the father's full benefit amount. If the total amount payable to all dependent family members exceed this limit, each person's benefit is reduced proportionately until the total equals the maximum allowable amount. However, even if the father decided to collect his benefit at 66, rather than delaying until age 70, his benefit would not be reduced by the family maximum limits. (For more on this,
click here).
I stumbled across this little-known benefit several years ago while researching optimal Social Security claiming strategies. At the time, I dubbed it the “Viagra College Fund”-- a reference to the fact that so many older men have started second families thanks to the miracle of modern medicine. Depositing those monthly Social Security checks into a tax-deferred 529 plan can go a long way to pay future college costs.
I suspect this benefit won't be around forever. The National Commission on Fiscal Responsibility and Reform co-chaired by Alan Simpson and Erskine Bowles has called for its elimination. They propose restricting dependent benefits to minor children and spouses of deceased beneficiaries, not living retirees
.
I'm sure this idea and many others will be debated whenever Congress gets around to tackling crucial Social Security reform. If approved, I doubt they would make any changes retroactive, but it could take effect immediately upon approval, the same way the Social Security Administration revised its pay-back strategy rules in December 2010.
In the meantime, if you have older clients with young families, tuck this tidbit away for future reference. It can make a big difference in the retirement and college planning advice you offer.
