Are you thinking of retiring and trying to figure out how to maximize your Social Security benefits over your lifetime? Glance through these five tips and you’ll be in a better position to understand how you can claim the biggest lifetime benefit based on your (and your spouse’s) work history.
For a bit of history, Social Security was enacted in 1935 during the New Deal as a retirement program. It is one the three income sources for seniors during retirement. Pension benefits and savings are the other two sources. Social Security is funded by a 6.2% tax on your wages. Your employer also pays 6.2% of your wages to the Social Security Trust Fund. You can see your Social Security Contribution on your paystub. It is often labelled FICA (Federal Insurance Contribution Act).
Social Security, like any private annuity or pension, pays you more per year the longer you wait to claim your benefit. Why? Because you have fewer years to collect the benefit. This fact is critical to understanding how to maximize your Social Security benefits
1. Single and/or Married for Fewer than 10 Years
If you are single or were married for fewer than 10 years, your biggest decision is when to claim your Social Security worker benefit. The full benefit is available at your Full Retirement Age (FRA), which varies depending upon your birth year. For persons born between 1943 and 1954, the FRA is 66. For persons born between 1955 and 1959 the FRA is 66 plus 2 months if born in 1955, 66 plus 4 months if born in 1956, etc. The FRA is 67 years of age for persons born in 1960 or after.
If you claim your worker benefit before your FRA, expect to take a hit in your monthly benefit. For example, if you claim at age 62 the earliest possible time, your monthly benefit will be 30% smaller than if you claimed at your FRA of 67. If you wait to claim at age 70, the benefit increase 8% per year, so that the benefit is about 24% bigger by waiting those three years from age 67. And if your FRA is age 66, the benefit at age 70 will be well over 30% bigger than at age 66.
Given today’s low interest rates, it is best to delay as long as possible to claim your benefit because the benefit increase is guaranteed. It is a wise move to lock-in the 8% increase/year for as many years as you can. If you do wait to claim, the downside is that you will have to either work longer or pull more from your savings to make ends meet until you claim your worker benefit.
One other thing to keep in mind is that waiting makes the most sense for folks who are in good health. Because age 82.5 is the breakeven point where waiting to claim at 70 will outweigh claiming at age 62. In other words your cumulative Social Security benefit will be greater by waiting to claim until age 70 as long as you live past age 82.5. So if longevity is in your genes, seriously consider delaying your benefit as long as you can.
2. Divorced after being Married for 10 or More Years
If you were married for 10 year or more and are now divorced and not remarried, you are eligible for spousal benefits based on the earnings of your ex-spouse. If you have reached your FRA, you can claim spousal benefits, which are 50% of your ex-spouse’s FRA benefit. By doing so, you can let your own worker benefit increase until age 70 when you claim your own worker benefit. Claiming spousal benefits from your ex-spouse won’t affect your ex’s benefits nor will your ex even know that you have claimed these benefits. So, if you are divorced you could obtain spousal benefit from your FRA to age 70 and then claim your own worker benefits.
If your spousal benefits are higher than your own worker benefits, it may make sense to claim them sooner, but they will be reduced if you have not yet reached your FRA as described above.
3. Claiming Benefits While Still Working
Are you thinking of claiming Social Security and still working? This isn’t a good idea if you are not yet at your FRA. If you have earned income above $15,720, then your Social Security benefits will be reduced by $1 for every $2 dollars of earnings above the 2015 limit of $15,720 (Social Security calls these “excess earnings”). There is a special rule for the year you reach your FRA and only $1 of every $3 earned above the limit is withheld.
You will get these withheld benefits back once you reach your FRA, because Social Security will recalculate your benefit. By claiming before your FRA, your benefit level will be permanently reduced. So think carefully if you are considering claiming Social Security and continuing to work before reaching your FRA because you may not get as much as you think.
4. Married and Planning for Survivor Benefits
If you are married and both spouses are entitled to Social Security, then the spouse with the highest benefit at age 70 should wait to claim at that time. If the spouse claiming at age 70 passes, the surviving spouse’s Social Security benefit will “step up” to the higher benefit of the deceased spouse. So this is a nice insurance policy for the surviving spouse. And given that at least one spouse is likely to live well into their 80s, it makes sense to have one of the spouses take advantage of the larger benefit for the remainder of their life.
5. Married and Maximizing Spousal Benefits
If you are married, there is a possibility to claim a spousal benefit and to keep accumulating your own worker benefits until they are maxed out at age 70. However, Congress has recenlty begun to phase out these strategies.
As noted above, spousal benefits are 50% of your spouse’s benefit. The advantage of getting a spousal benefit is to delay the spouse taking the spousal benefit from claiming their own benefit and therefore gaining more credits to increase their eventual worker benefit. The spouse claiming spousal benefits needs to be at FRA so that their own benefit won’t be permanently reduced for claiming before their FRA.
For this strategy to work, the other spouse also needs to have claimed their benefit. He or she can keep their benefit or suspend it in order for it to grow. Social Security allows a person to claim at FRA and then suspend their benefit so their spouse can get the spousal benefit, while the suspending spouse can let their benefit increase. The key here is that a couple needs to consider which spouse has the higher benefit at age 70 and whether receiving spousal benefits before their own worker benefits provides a bigger lifetime payout. A critical factor is the age difference between the spouses and their worker history.
Use these tips to think about how you can maximize your lifetime Social Security benefits.