How to calculate the maximum family benefit from Social Security

A young family can change the equation, so that claiming early makes sense.

Jul 22, 2014 @ 12:50 pm

By Mary Beth Franklin

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The Social Security Administration estimates that 4.4 million children receive about $2.5 billion each month because one or both of their parents are disabled, retired or deceased.

I often argue about the value of delaying Social Security benefits until full retirement age or later, but when a young family is involved, claiming benefits early can make sense.

One reader asked me to weigh in on the wisdom of collecting Social Security as soon as possible at age 62. His situation: He is 61 and has a 43-year-old wife and two young children, ages 7 and 4.

If he waited until his full retirement age of 66 to claim Social Security benefits, he would collect about $2,500 per month. At 62, it is closer to $1,850 per month. But claiming early means his family could also collect benefits four years early.

(Don't miss Mary Beth on 3 smart Social Security strategies for married couples)

Each of his two children could receive a monthly payment of up to 50% of the worker's full retirement age benefit, also known as his primary insurance amount. Even though the reader would be collecting a reduced benefit for claiming early, family benefits are based on his full retirement age amount. The children are eligible to receive Social Security benefits up to age 18 or 19 if they are still in high school.

Technically, his young wife is also eligible for a benefit of up to 50% of his PIA if she is caring for a child under age 16.

But there is a limit to how much can be paid out to family members based on one worker's earnings record. The total varies, but generally the maximum family benefit — including the worker's benefit — is 150% to 180% of the worker's full retirement benefit.

If total family benefits exceed the maximum amount, the family benefits would be reduced proportionately, but the worker's retirement benefit would not be decreased (beyond the 25% reduction for claiming benefits early). To compute the reduced benefit amount, Social Security subtracts the worker's PIA from the applicable family maximum amount and divides the remaining balance among the other people entitled to benefits on his earning record.

(See also: Updated book is an essential guide to Social Security)

But there's a big caveat: If the reader claims reduced retirement benefits early and continues to work, his benefits could be reduced or wiped out if his earnings exceed annual limits. For 2014, workers who claim retirement benefits before full retirement age lose $1 in benefits for every $2 earned over $15,480 annually.

And if the worker loses benefits to the earnings cap, other family members who get benefits based on his record could also lose benefits.

The earnings cap disappears at full retirement age and any of the worker's forfeited benefits are restored at that point.

So the bottom line is, if this reader plans to stop working at 62, claiming Social Security benefits early could be a smart move for him and his family.

But with a wife nearly 20 years his junior, the reader should also be concerned about survivor benefits. Collecting reduced retirement benefits early would also leave her with a reduced survivor benefit. But there's a remedy for that problem, too.

Once he turns 66, the reader could voluntarily suspend his retirement benefits in order to earn delayed retirement credits worth 8% per year for each year he postpones collecting beyond his full retirement age up to age 70. His suspension would not affect his family's benefits (but his suspended benefit would still be counted in the family maximum formula).

Assuming he could forgo four years of retirement benefits, he could nearly restore his full Social Security benefit. The additional 32% boost in delayed retirement credit would increase his reduced retirement benefit to 99% of his full retirement age benefit at 70 (75% x 1.32 = 99%).

(Questions about Social Security? Find the answers in my new ebook available at www.investmentnews.com/MBFebook.)

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