Mary Beth Franklin: Don’t forget kids in Social Security strategy

When I travel around the country speaking to consumers and financial advisers about Social Security claiming strategies, I often joke about the “Viagra College Fund.”

That’s how I refer to the provision that provides Social Security benefits to a dependent child when a parent claims retirement or disability benefits. Stash that extra income into a 529 plan, and you just may be able to pay for a Harvard education someday.

The combination of high divorce rates and incidence of remarriage of older men to younger women has led to a rash of AARP-card carrying 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 IRA beneficiary designations. It can influence when a parent should claim Social Security benefits.

Qualified child

To be eligible for Social Security benefits, a child must be unmarried and under 18 or under 19 if still a full-time elementary or high-school student. Disabled children over age 18 are also eligible for benefits as long as the total disability began before age 22.

The child can be your 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 your 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 full retirement age, the child’s benefit is based on half of the parent’s full retirement benefit.

The same calculation applies if there is more than one child. And, as the caregiver of a minor child, a spouse could also receive up to half of 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 somewhere between 150% and 180% of his full retirement benefit based on his earnings. In that case, the child’s and spouse’s benefit may be reduced to less than half of the worker’s primary insurance amount to satisfy the family maximum payment limit, but the worker’s own benefit will not 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. Boris 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 still qualifies for Social Security benefits based on Boris’s earnings record).

Boris asked if it would make sense to claim his retirement benefit as early as possible at age 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. In 2013, they lose $1 in benefits for every $2 earned over $15,120. That means if you earn more than about $45,000, all your Social Security benefits would be wiped out (but the Social Security Administration would recalculate your benefit once you reach normal retirement age to recapture those forfeited benefits).

In addition to the impact on your own retirement benefits, excess earnings can reduce any spousal or child benefits based on your record. The earnings cap disappears once you reach your full retirement age.

Boris earns about $70,000 per year, but said 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 financial advisers optimize Social Security claiming strategies, to crunch the numbers for him. Their recommendation: Boris should claim benefits as soon as he is eligible at age 62.

“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’s full retirement benefit of $2,180 per month,” Ms. Brewton said. “His son will continue to receive benefits until he graduates from high school or reaches age 19, whichever comes first.”

Ms. Brewton estimated their joint cumulative lifetime benefit will be about $609,000, assuming Boris lives to his normal life expectancy of 85. If Boris believes he will live a much longer life than 85 years, waiting until an older age to collect a larger retirement benefit may result in a greater cumulative benefit even though it would reduce the amount of time his son could collect benefits, she added.