Should you take benefits ASAP or wait? It's the million-dollar retirement question, but it's far from the only factor involved in making the most of your Social Security nest egg. There are other possibilities to consider as well.
As a source of guaranteed income, Social Security is a vital part of a retirement plan. However, far too many people give scant thought to their options when claiming benefits. Instead, they opt to claim at one of three distinct periods: at the earliest possible opportunity, at full retirement age or at the latest possible opportunity. By failing to examine all your options, you could be leaving money on the table.
More than half of Americans cite Social Security as the largest component of their retirement income as they approach the end of their careers. Fortunately, if you follow a few specific steps, you can ensure that you have the best possible information available about the pros and cons of claiming at different ages. By arming yourself with information, you can position yourself to maximize your monthly Social Security benefit, creating a more comfortable retirement.
The ABCs of Social Security Benefits
The federal government bases your Social Security benefit on the 35 years of your work history where you earned the most. For those with an uninterrupted work history spanning greater than 35 years, that means that years of low earnings are dropped from the calculation, increasing your overall benefit.
However, those with interrupted work histories or who started working later or quit working early may not have a complete history of 35 years. In those cases, zeros are substituted for those years for benefit calculation purposes.
You need a minimum of 10 years of work history to receive Social Security benefits, except in the case of a non-working spouse of a worker with that type of employment history. Non-working ex-spouses who were married for 10 years or more also qualify based on their former spouse’s employment record.
Under the current Social Security system, you can begin to receive benefits at any time beginning at age 62 and ending at age 70. While claiming at age 62 puts income in your bank account at the earliest possible opportunity, that decision comes at a cost. Figure 1 shows how a benefit of $1,000 a month expected at full retirement age is impacted by claiming early and claiming later. Claiming at age 62 reduces the monthly benefit by 25% while waiting until age 70 increases the benefit by 32%. There is no benefit to be gained by waiting until after age 70 to claim under the current benefits law.
Figure 1: Advantages of Waiting to Claim Social Security
Swipe to scroll horizontally
Header Cell - Column 0
Start at 62
Start at Full Retirement Age
Start at 70
Monthly Benefit
$750
$1,000
$1,320
Yearly Benefit
$9,000
$12,000
$15,840
Aggregate Benefits Paid Through age 85
$216,000
$240,000
$253,440
If you were born in 1955 or later, the age at which you can receive full retirement benefits is between 66 and 67, depending on your date of birth.
How to Understand Your Benefit
Every year, the Social Security Administration produces statements for beneficiaries. You must access your statement online, unless you are over age 60, in which case you can still receive a snail mail version. Social Security also offers an online Retirement Estimator tool, which you can find at https://www.ssa.gov/benefits/retirement/estimator.html. It’s recommended that you sign up for a Social Security online account to access the system, which you can do at https://www.ssa.gov/site/signin/en/.
The Retirement Estimator tool provides information about:
Your estimated benefit at full retirement age
Your estimated benefit at age 70
Your estimated benefit at age 62
Your earnings history
Estimated total Social Security and Medicare taxes paid by you and your employers
Your estimated benefits change from year to year based on your current earnings, which Social Security assumes will continue until retirement. That’s why an old estimate may no longer be valid, especially if you have changed employers, jobs or the time you spend on the job.
You only receive Social Security credits for jobs where you and your employer pay into the system. So, if you work “off the books,” those earnings won’t increase your eventual Social Security benefit.
To ensure that your earnings history is correct, go through it and make sure nothing is missing. If there are inaccuracies, you can contact Social Security either by phone or over the website to correct those issues. You want to ensure your earnings history is correct because the Social Security Administrations uses your past earnings history to calculate your future benefits.
To determine the best way to maximize your monthly Social Security benefit, follow these five steps:
Strategy #1: Analyze your life expectancy
Discuss your family history and current health status with your health care providers to get a reliable picture of how long you can expect to live, keeping in mind that most retirees underestimate their life expectancies. While this process may feel morbid, it is essential for getting the most out of your Social Security benefit. If your family tends to have strong longevity, it can make sense to delay benefits. However, if you have a serious or chronic health condition, it might make sense to claim earlier.
Strategy #2: Understand the range of benefits available
Contextualize your retirement earnings by analyzing how much your income would be each month if you drew on Social Security at each age and contrasting this with your lifetime benefit at each age. This is called an income gap analysis, which you can conduct using the estimated benefits provided by Social Security. Social Security offers a number of useful calculators to help you get a better grip on your benefits and retirement at https://www.ssa.gov/planners/calculators/.
Strategy #3: Maximize your current earnings
Increasing your earnings is one of the best ways to maximize your ultimate benefit. Any higher earning years later in life will replace lower earning years if you have 35 years of work earnings history. If you don’t, maxing out your earnings history as much as possible can only help in terms of receiving additional credits that translate into a higher benefit.
Strategy #4: Coordinate spousal benefits
Married couples will have many more options to review when deciding when to file. If you were born on or before Jan. 1, 1954, once you reach full retirement age (assuming you have NOT yet claimed your benefits) you can use a restricted application to claim a spousal benefit. This allows your own benefit to continue to grow. You could then switch to your own higher benefit amount when you reach age 70. If you were born after Jan. 1, 1954, this option is no longer available.
In that case, consider the benefits of receiving Social Security benefits versus continuing to work. To do this, you need to consider what your benefit would be if you retired now versus what it would be later if you continue to work. It’s also a good idea to factor in age differences, life expectancy differences, benefit differences and retirement timelines when deciding when each spouse should claim. Check out these resources for more information: Married Couples: Coordinate Social Security Claims to Boost Benefits and Social Security Factors for Married Couples.
Strategy #5: Integrate Social Security into your retirement income plan
The income gap analysis you completed in Step #3 comes in handy here as you can then use the information you’ve gathered to determine how the potential amounts of Social Security benefit available to you at various ages aligns with your overall spending needs. An income gap analysis is extremely useful in gaining visibility into your entire retirement income plan. The difference between the benefit and the spending needs is the true income amount needed from your other retirement accounts.
Without knowing that you have maximized Social Security benefits you may be over stressing the other retirement income sources by making larger withdrawal distributions than you actually need. This may result in your retirement accounts being spent down faster than they need to be or over/under exposure of certain investment asset allocations in order to gain needed income.
Amy Buttell contributed to this article.
Disclaimer
This article was provided by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.
Robert Trejo is a Certified Financial Fiduciary®, an Investment Adviser Representative and Senior Managing Partner of Coeus Financial, an independent, full-service wealth management firm.
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