Choosing the right time to collect Social Security can boost your income

The following is an excerpt of an excellent article written by Mary Beth Franklin, Senior Editor, Kiplinger's Personal Finance

Not so long ago, some people planning for retirement wrote off Social Security as an endangered benefit and a marginal addition to their post-career income. But in an era of disappearing pensions and erratic stock-market returns, the idea of guaranteed income for life that keeps pace with inflation holds fresh appeal. Increasingly, near-retirees are becoming aware of the value of working longer and waiting to collect Social Security benefits until the benefits are worth more.
But there are also a few clever -- and perfectly legal -- ways to time the collection of your retirement benefits to increase monthly checks for you, your spouse and any minor dependents. Play your cards right and you could increase your household income by thousands of dollars a year now, plus ensure larger benefits later.

The Basics

Although you can collect Social Security benefits as early as age 62, you may not want to. Your retirement benefits will be reduced by 25% or more for the rest of your life. And if you continue to work, your benefits could be further reduced -- even wiped out completely -- if you earn more than the prescribed limit.

In 2011, you lose $1 in benefits for every $2 you earn over $14,160. A more generous earnings cap applies in the year you reach your normal retirement age: You lose $1 in benefits for every $3 you earn over $3,140 per month during the months leading up to your 66th birthday. Once you reach your normal retirement age, the earnings cap disappears. Other types of income, such as pensions, interest and dividends, do not reduce your Social Security benefits.

Of course, for some people, waiting to collect Social Security is not an option. If you need the money, or you are in poor health and fear that you may not live long enough to collect benefits at your full retirement age, you should collect your Social benefits as soon as you are eligible at age 62. That assumes you are no longer working or, if you are, your earnings don't exceed the annual earnings limit by much.

But if you're able, it pays to wait. After you reach your normal retirement age, you can increase your benefits by an additional eight percentage points for each year you delay collecting, up to age 70, creating a larger base for future cost-of-living adjustments and a bigger benefit for a surviving spouse.

No More Do-Over

In the past, retirees who collected benefits early and regretted the decision later could repay all the benefits they had received and restart their benefits at a much higher level based on their current age. But that is no longer an option. In December, the Social Security Administration revised its do-over rule. From now on, you can only suspend benefits once during your lifetime, and it must be within 12 months of your initial claim. You will no longer be able to repay past benefits, but once you resume collecting retirement benefits, Social Security will recalculate the amount to take into account the months or years you suspended them, resulting in a larger payment than your initial amount.

Combo Approach

For some married couples, a combination strategy may make sense. The lower-earning spouse (usually the wife) could collect Social Security benefits early, and the higher-earning spouse could delay claiming benefits for as long as possible, up to age 70. Although the wife's retirement benefits will be permanently reduced, collecting benefits early will have no impact on her survivor benefits as long as she is at least normal retirement age when she begins collecting survivor benefits. If her husband dies first, she will be entitled to 100% of the monthly amount he received during his lifetime -- with no reduction in benefits. Of course, her own retirement benefit would disappear at that point. Read on to discover a few more creative strategies.

File and Suspend

Sometimes, the spouse who has little or no work history (again, often the wife) may be eager to collect spousal benefits -- worth up to half of what the main breadwinner receives. Normally, the wife must wait for her husband to file for his Social Security benefits before she can collect her share. But there's a way for her to collect spousal benefits while her husband's retirement benefit continues to grow.

As long as he waits until he reaches his normal retirement age, the husband can exercise a strategy known as file and suspend. That means he can file for his benefits, entitling his wife to receive spousal benefits immediately; then he can suspend his own benefits and continue to accrue delayed-retirement credits until age 70. (Note: If the wife collects benefits before her normal retirement age, her spousal benefits -- normally worth half of her husband's benefit -- will be reduced by 25% or more.) At 70, his benefits would be worth 132% of what they would have been at 66, creating a larger base for future cost-of-living adjustments. (Spousal benefits are based on half of the worker's benefit at normal retirement age, not including the delayed credits. But survivor benefits are worth half of the husband's amount, including the delayed credits).

Let's say he is entitled to $2,000 a month at age 66. He could file and suspend so that she could collect half that amount -- $1,000 -- in spousal benefits at her normal retirement age. But if she claims benefits as soon as she is eligible at age 62, her share would be reduced by 25%, to $750 per month. The reduction for collecting benefits early at age 62 will increase to 30% when the normal retirement age rises to 67 under current law.