In 2012 there were 2.7 million grandparents who had primary responsibility for a grandchild under the age of 18, according to a recent US Census Bureau report. Many of these grandparents don’t know that Social Security retirement benefits for dependent grandchildren is a real possibility.
Retirement doesn’t always go as expected. It hasn’t for the some people I have worked with. Instead of the frequent traveling they had always planned for their retirement, they are raising their young grandchildren. There’s no sense of burden though, they strongly believe it’s a privilege to have the mental, financial, and physical health that affords them the chance to offer security to their grandchildren. I admire their attitude! I hope that I would feel the same if I were placed in their situation.
Although one of the couples had a well thought out retirement income plan, they’ve quickly discovered that the extra expense of raising kids will require them to increase their monthly cash flow. They were surprised when I advised them to file for Social Security benefits immediately. They had always planned to wait until full retirement age to file for benefits, but that all changed when they found out that by filing for their own benefits, they would turn on Social Security benefits to their dependent grandchildren as well.
It’s not one of the more well known benefits, but under the right conditions grandchildren (or step-grandchildren) can receive a benefit based on the work history of a grandparent. The Social Security Handbook spells out the requirements in their typical murky fashion.
A dependent grandchild or step-grandchild of the worker or spouse may qualify for benefits as a “child” if:
The grandchild’s natural or adoptive parents are deceased or disabled:
At the time the worker became entitled to retirement or disability insurance benefits or died; or
At the beginning of the worker’s period of disability which continued until the worker became entitled to disability or retirement insurance benefits or died; or
The grandchild was legally adopted by the worker’s surviving spouse in an adoption decreed by a court of competent jurisdiction within the U.S. The grandchild’s natural or adopting parent or stepparent must not have been living in the same household and making regular contributions to the child’s support at the time the insured worker died.
Besides meeting the requirement in (A) or (B), the grandchild or step-grandchild must be dependent on the insured as described in § 336.
Although that sounds technical, these rules are fairly easy to understand. There are two main rules.
The grandchild (or step-grandchild) must be a dependent.
It’s important to note that Social Security’s definition of dependent is as follows:
To be dependent on the worker, a grandchild (or step-grandchild) must have:
Begun living with the worker before the grandchild became 18 years old; and
Lived with the worker in the U.S. and received at least one-half support from the worker:
For the year before the month the worker became entitled to retirement or disability insurance benefits or died; or
If the worker had a period of disability that lasted until he or she became entitled to benefits or died, for the year immediately before the month in which the period of disability began.
If the grandchild was born during the one-year period, the worker must have lived with and provided at least one-half of the grandchild’s support for substantially all of the period from the date of the grandchild’s birth to the month indicated in (B) above.
Essentially, the Social Security administration has taken the normal definition of dependent and added the additional requirement of living with the grandparent for at least one year prior to filing for benefits.
So far, it sounds pretty easy. Unfortunately, this next rule is what disqualifies many grandparent/grandchild households from grandchildren’s benefits.
To qualify for Social Security benefits, one of the following must be correct.
A) Both parents are disabled or deceased
B) You are the legally adoptive parent of the grandchild.
How Much Is The Benefit?
Children (or grandchildren in this case) are generally eligible to receive an amount equal to 50% of your full retirement age benefit, up to a “family maximum” benefit. The family maximum varies, but is equal to 150 to 180 percent of your full retirement age benefit. Here’s how they figure the Formula For Family Maximum Benefit.
For example, if your full retirement age benefit is $2,000, the maximum benefits that can be paid on your work record is $3,498. For those raising kids, that extra $1,498 will be welcomed.
Why Is This Important?
For a household with grandchildren, extra care and expertise should be applied when applying for Social Security. The penalty for not understanding the rules and the resulting difference in lifetime benefits can be enormous.
Consider the difference in lifetime benefit amounts for a couple with the following circumstances.
-Full Retirement Age Benefits: $2,000 for one spouse & $1,000 for the other spouse.
-Two grandchildren ages 8 & 10.
In the first example, they simply waited to file at full retirement age. Over the course of their lifetime (through age 85) they received $874,705 in Social Security benefits. These were benefits paid on their own work record only.
In the next example, they filed for benefits at age 62! Why? It’s because the benefits to the grandchildren are not available without the grandparent filing first.
In many cases, delaying your filing age is a smart move for multiple reasons. But not all cases are the same! In this case they were able to collect an additional $111,920 in lifetime benefits by filing early and turning on the benefits to their grandchildren.
I hate one size fits all Social Security advice. A situation like this illustrates that filing strategies are dependent on individual circumstances. Before you make a filing decision, make sure you understand your options.