When I speak to consumers and financial advisers about strategies for claiming Social Security, I often joke about the “Viagra College Fund.”
That is how I refer to the provision of Social Security benefits to a dependent child when a parent claims retirement or disability benefits. Stash that extra income into a Section 529 college savings plan, and a parent just might be able to pay for a Harvard education someday.
The combination of high divorce rates and the incidence of older men remarrying younger women has led to a rash of card-carrying AARP dads pushing baby strollers.
The second-family phenomenon can have a huge impact on a parent's retirement-planning strategy that goes well beyond boosting life insurance coverage and updating beneficiary designations for individual retirement accounts. It can influence when a parent should claim Social Security benefits.
To be eligible for benefits, a child must be unmarried and under 18, or under 19 if still a full-time elementary or high school student, when the parent retires and claims Social Security. Children who are fully disabled over 18 are also eligible for benefits as long as the full disability began before 22.
The child can be a natural child, legally adopted child, stepchild and in some cases a grandchild if the child's parents are dead or disabled and the child is the dependent.
The child's benefit is based on 50% of the parent's primary insurance amount at full retirement age. Even if the parent claims reduced retirement benefits early or larger benefits by delaying his or her full retirement age, the child's benefit is based on half the parent's full retirement benefit.
The same calculation applies if there is more than one child. Also, as the caregiver of a minor child, a spouse also could receive up to half the worker's retirement benefit until the youngest child turns 16.
But the total amount paid on a worker's record is capped at the family maximum, which falls between 150% and 180% of his or her full retirement benefit, based on earnings. In that case, the child's and spouse's benefits may be reduced to less than half the worker's primary insurance amount to satisfy the family maximum-payment limit, but the worker's own benefit won't be affected.
WHEN TO CLAIM
A reader named Boris wrote to me recently asking for advice on when to claim his Social Security retirement benefit.
He is a 60-year-old single dad with a 4-year-old son. Boris and the boy's mother are not married, but as his natural child, the boy qualifies for Social Security benefits based on Boris' earnings record.
Boris asked if it would make sense to claim his retirement benefit as early as possible at 62, even though it would mean reduced retirement benefits for the rest of his life, but a longer period for his son to collect benefits as a dependent minor.
Keep in mind that workers who claim benefits before their full retirement age are subject to annual earnings cap limits. This year, they lose $1 in benefits for every $2 earned over $15,120.
That means that for those who earned more than about $45,000, all their Social Security benefits would be wiped out, but the Social Security Administration would recalculate their benefit once they reached normal retirement age to recapture those forfeited benefits.
In addition to the impact on one's own retirement benefits, excess earnings can reduce any spousal or child benefits based on that individual's record. The earnings cap disappears once full retirement age is reached.
Boris earns about $70,000 a year but said that he could afford to stop working and rely on savings to augment his Social Security benefits.
I asked the folks at Social Security Solutions Inc., a company that helps consumers and advisers optimize Social Security-claiming strategies, to crunch the numbers.
“In order to maximize his lifetime Social Security — and assuming he is not working and subject to the earnings test — Boris should claim his benefits as soon as he is eligible at age 62,” said Robin Brewton, vice president of client services for Social Security Solutions.
“He will claim about $1,644 per month for the remainder of his life, while his son will claim about $1,090 per month — half of Boris' full retirement benefit of $2,180 per month,” she said. “His son will continue to receive benefits until he graduates from high school or reaches age 19, whichever comes first.”
Ms. Brewton estimated that their joint cumulative lifetime benefit will be about $609,000, assuming that Boris lives to a life expectancy of 85.
If Boris thinks that he will live well past 85, waiting until a later age to collect a larger retirement benefit may result in a greater cumulative benefit, even though it would reduce the amount of time that his son could collect benefits, she said.
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