Personal Finance: The Keys to Understanding Social Security Family Benefits

Wednesday, February 18, 2015

Joe Alfonso, GoLocalPDX Contributor

Photo Credit: iStock

I recently met with a gentleman, whom I will call Fred, whose situation illustrates the unique Social Security planning opportunities available around family benefits.

Fred is 68 and remarried later in life. His current wife is in her forties and has never worked outside the home. Fred and his wife have two children, ages 13 and 15. Fred is still working and is a high earner. He has not yet filed for Social Security and is projected to eventually receive near the maximum retirement benefit based on his earnings history.

Fred knew about the credits he could earn by delaying his retirement benefit to age 70. By not claiming his benefit at age 66, his full retirement age (FRA), and waiting until age 70, Fred’s benefit will increase by 8% for each year he delays, resulting in a 32% increase over his FRA benefit. Deciding to delay was a smart move on Fred’s part since the delayed retirement credits (DRCs) he will receive will allow him to maximize his Social Security income during his life while also maximizing the survivor benefit that he is likely to leave his wife given their significant age difference.

Fred was not aware, however, that he was leaving lots of money on the table in the form of Family Benefits to which his wife and children are eligible.

Caretaker Spouse Benefit

The spouse of a Social Security retirement beneficiary caring for a child under the age of 16 is eligible for a benefit valued at 50% of the FRA benefit of the beneficiary spouse. Fred’s FRA benefit was about $2,500 month, so his wife is currently eligible for a monthly caretaker spouse benefit of $1,250, or $15,000/year. And because she is not earning a wage, she is not subject to the annual earnings test that withholds benefits if a beneficiary exceeds an annual earnings limit while collecting Social Security benefits before FRA.

Children’s Benefit

Each of Fred’s children were eligible for their own benefit, also valued at 50% of Fred’s FRA benefit, until they each turned age 18, or age 19 if still in high school. Since both his children are under 16, they are eligible to receive a combined benefit of $2,500/month ($1,250 each).

What Should Fred Do?

The above family benefits are only available if one of the spouses has filed for their Social Security retirement benefit. As mentioned earlier, Fred is delaying his application because he wants to maximize it by earning delayed credits. Is Fred stuck with having to wait until age 70, thereby forgoing both his own benefit and the benefits his family members are eligible to receive in the interim?

Much to Fred’s delight, I informed him that it is possible under the Social Security rules, beginning at FRA, to immediately entitle his family to benefits without having to forgo delayed credits onhis own. Using the File and Suspend strategy, Fred is able to file for his retirement benefit now and then immediately suspend it. This strategy allows Fred‘s family to claim family benefits based on his record while still allowing Fred to delay his own benefit to continue to earn DRCs. Given that Fred is age 68, he has already missed out on two year’s worth of family benefits, costing him approximately $90,000. Fred was determined not to miss out on any more benefits and planned a trip to the local Social Security office immediately.

Maximum Family Benefit Limitation

It is important to be aware that total family benefits are limited to approximately 150-180% of the FRA benefit of the primary worker. Fred’s family will not be impacted by this for now since he is not receiving his retirement benefit. His family may be impacted in the future once he begins to collect his benefit. However, any reductions will be taken on a pro-rata basis from his wife and or children’s benefits while his own benefit will be unaffected.

Fred’s case is not typical but is becoming more prevalent given the trend to marry and start a family later in life. Knowing the rules governing family benefits can result in significant additional income to these families, many of whom are often struggling with the task of saving for their impending retirement while also planning for their children’s college education.

Readers with questions on personal finance and Social Security can email Joe Alfonso at [email protected].

Joe Alfonso, CFP®, ChFC, EA regularly writes on financial topics and is an expert on Social Security planning. He is founder of the Fee-Only financial planning firm Aegis Financial Advisory in Lake Oswego, Ore., and is the principal advisor for the firm. Joe is a CERTIFIED FINANCIAL PLANNER™ professional and an Enrolled Agent, admitted to practice before the IRS to represent taxpayers at all administrative levels for audits, collections, and appeals. He is a member of The National Association of Personal Financial Advisors (NAPFA).