Retiring? Here’s how to get an extra month of Social Security benefits for free

Social Security rules are complicated and change often. For the most recent “Ask Larry” columns, check out

Boston University economist Larry Kotlikoff has spent every week, for over two years, answering questions about what is likely your largest financial asset — your Social Security benefits. His Social Security original 34 “secrets”, his additional secrets, his Social Security “mistakes” and his Social Security gotchas have prompted so many of you to write in that we feature “Ask Larry” every Monday. Find a complete list of his columns here. And keep sending us your Social Security questions.

Kotlikoff’s state-of-the-art retirement software is available here, for free, in its “basic” version. His new book, “Get What’s Yours — the Secrets of Maximizing Your Social Security Benefits,” (co-authored with Paul Solman and Making Sen$e Medicare columnist Phil Moeller) will be published in February by Simon & Schuster.

I want to pass along a Social Security collection method I just learned about, care of Mike O’Connor, an engineer in my software company, and Jerry Lutz, the former Social Security technical expert who has been double checking the answers in my weekly Ask Larry columns.

Mike had been refining our code on Social Security’s Adjustment of the Reduction Factor (ARF) and discovered what he thought was a way for anyone retiring to collect an extra month of Social Security benefits for free. The details are excruciating, but the basic point can be understood via an example.


Pose Your Questions to Larry Here

Let’s go back to the beginning of this year, and take Joe, age 63, as a hypothetical guy nearing retirement in June. He wanted to start collecting his Social Security benefit in August even though he realized it would be subject to an early retirement reduction. He would be earning nothing from August on (we’ll leave his earnings in July to the side for the moment).

Because he’d have some months (certainly August through December) in 2014 where he would earn less than $1,290 — the annual earnings test exempt amount of $15,480 divided by 12 months — he’d be given what Social Security calls a grace year, during which the earnings test, which would have been applied to earnings before Joe started collecting his retirement benefit, would not be applied.

The reason Social Security even has this grace year is that in years other than the year in which you start collecting your retirement benefit, the earnings test is applied on a total calendar-year basis, rather than prorated to a monthly basis.

Anyway, thanks to the grace year, Joe’s earnings before July didn’t get hit by the earnings test. Now, if Joe did what he planned and stopped working in June and told Social Security he wanted to collect as of August, he wouldn’t get the extra month of free benefits.

But what if he told Social Security that he wanted to collect as of July and also worked enough in July to lose a very small amount of his July Social Security benefits via the earnings test. Suppose, for example, that he earned $1,291 in July and $15,490 for the year. Then he’d have exceeded the annual earnings test by $10, and would lose $5 in benefits in July due to the earnings test.

In this scenario, Joe would receive one month’s extra benefit, less $5, at the expense of having all his benefits from August through the month he reaches full retirement age reduced by one extra month’s reduction. This expense would total about 20 percent of one month’s benefit. Hence Joe would be up roughly 80 percent of one month’s benefit.

The reason this happens is because Social Security applies the ARF on a full-month, rather than a partial-month, basis. Consequently, from full retirement age on, Joe would receive the same monthly benefit that he’d receive were he to begin collecting in August rather than July.

If Joe were age 65, rather than 63, he’d get a full month’s extra benefit, less $5 at the cost of losing less than 7 percent of one month’s benefit. So the closer to the year of reaching full retirement age that Joe does this, the closer to a full month’s benefit he’d receive.

Things would get a bit more complex if Joe tried to do this in his full retirement year. He’d need to be a high earner to pull this off effectively in the year he reaches full retirement. Also, making this play can have dire consequences for collecting spousal or widow(er) benefits. As I’ve explained in prior columns, the minute you file for your own retirement benefit, you are plunged into excess benefit world, meaning you can no longer collect a spousal or divorced spousal benefit or a widow(er) or a divorced widow(er) benefit by itself.

But if you are going to file for your retirement benefit early, you can take advantage of this option if you play your cards right.

An Update: Mr. Bernard, from the the Holyoke, Massachusetts, Social Security Office, Comes to the Rescue

In my column two weeks back, I described how a disabled lady (I called her Ann) who lives near Holyoke, Massachusetts, was denied her option to withdraw the automatic conversion of her disability benefit into a retirement benefit and, thereby, was losing the ability to collect a full retirement benefit on her own.

I called the Holyoke office myself to help Ann and spoke to Mr. Bernard, a lovely guy who immediately understood what Ann wanted to do. He set up an appointment to meet with her in December, and is going to file the request for Ann. Whether Social Security properly processes the request is something we’ll have to wait and see. But the system’s regulations clearly provide for this option. I will keep you posted!