Planning for retirement involves thinking about a wide range of issues. While people likely have private or work-sponsored retirement savings, they also need to think about how benefits like Social Security will fit into the larger picture. Depending on how and when you draw on Social Security benefits, the payout can range drastically. By playing your cards right, you might be able to draw an additional $15,000 a year or more, but maximizing the payout requires some advanced planning. The following tips will help you get the most from your Social Security benefits during your retirement years:
Understand the Social Security formula.
Many pension plans are based on the last few years of earning before retirement, but Social Security takes a much wider look at work history. The benefit amount is determined by the average of the top 35 years of work after adjusting for inflation. This fact is very important to keep in mind because many people may have had part-time jobs during high school or college. These incomes appear on Social Security statements, and having a few years of very low earnings can affect your average quite dramatically.
Even a few years spent unemployed or underemployed can significantly reduce your retirement benefits. However, when you understand the formula, you can plan to work extra years. For example, if you held a part-time job for two years in college, with earnings of only about $5,000 annually, you can plan to work at least 37 years before retirement to maximize your average earnings. Working extra years can also provide another advantage because benefits increase the longer you wait to draw on them.
Claim benefits as late as possible.
Many people choose to start drawing on their Social Security benefits at the earliest possible age, which is 62. However, doing so limits the income that you might receive. When you claim benefits before your full retirement age, which is 66 or 67 depending on the year you were born, then the income from Social Security is permanently reduced by 6.67 percent for each year that you claim early, up to 36 months. Claiming benefits more than 36 months early will result in an additional reduction of 5 percent per year.
Waiting longer than your full retirement age will give you a bonus on your benefits. For each year that you choose to wait, the benefit permanently increases by 8 percent, up to age 70.
Translating this point into numbers helps drive the point home. If you have a benefit of $1,500 at full retirement age, you will only receive $1,125 per month if you file at age 62. However, waiting until you are 70 will result in a benefit of $1,980 per month.
File strategically with a spouse.
Formerly, many spouses used the “file-and-suspend” strategy. One spouse would file for benefits but then immediately suspend them so that the benefit would grow while the other spouse files a spousal claim on his or her work record. While Congress has banned this practice, other advantageous strategies are still allowed.
Today, it is common for the lower earner in a marriage to claim benefits at full retirement age or before, which allows the higher earner to wait until age 70 to reap the maximum delayed retirement credit. While this strategy requires someone to continue working past retirement age, it does provide some income until the higher earner reaches age 70, at which point the couple will get a nice boost. Of course, if both workers can wait until they are 70 to claim benefits, then the Social Security income is maximized. Spouses should discuss the strategy that they want to employ long before they approach retirement age.
Social Security collectors can still hold a job.
Many individuals do not realize that they can continue to work while they claim Social Security benefits. When this happens, the Social Security Administration ignores a certain amount of earnings when calculating the benefit.
If you will reach full retirement age after the current calendar year, you will have the first $15,720 of earnings ignored. Each $2 earned beyond that reduces benefits by $1. If you will reach full retirement age this year, the first $41,880 earned is ignored, and then every $3 in excess results in a $1 reduction in Social Security income. In this case, only earnings from months prior to your birthday count. Those beyond full retirement age can earn as much as they would like without any effect on benefits.
You should understand that these reductions in benefits are actually just withholdings that will be paid at a later date. While the benefit check received while working will be decreased, overall Social Security income will be permanently increased later on after you reach full retirement age.
Divorced individuals may still have marital benefits.
If you are over the age of 62 and have divorced but not remarried, you may be able to receive benefits based on your ex-spouse’s work history. The marriage must have lasted at least 10 years, and it does not matter whether your former spouse has married again or not.
The possible income you can claim is one-half of your ex-spouse’s retirement benefit at full retirement age. Like other benefits, claiming early will reduce monthly payments. You may also be able to claim the divorced spouse’s benefit if you have since remarried if that marriage ended in divorce, annulment, or death. Of course, this strategy only makes sense if your own benefit is less than that you would receive based on your ex-spouse’s work history.