How to claim your Social Security benefits can be a critical and complex decision. Making this choice without understanding the factors that can influence the amount you will ultimately be able to collect in Social Security benefits can cost you tens of thousands of dollars in retirement. Before you make a choice about claiming benefits, it is wise to speak with a retirement planning professional to be sure you are making the most advantageous choice.
When to Claim
The most basic thing to understand about claiming Social Security benefits is that claiming early results in a significant reduction in monthly benefits. Although 62 is the most popular age to begin receiving benefits, electing this option limits your Social Security income to the minimum benefit amount. For workers now turning 62, taking benefits at this age results in a monthly payment that is 25% less that would be collectable at full retirement age, which is currently 66. For those born between 1955 and 1959, full retirement age is increased by two months for each birth year after 1954. This means that for those born in 1957, for example, full retirement age is 66 and 6 months. For those born in 1960 or later, full Social Security benefits accrue at age 67.
Delaying benefits beyond full retirement age results in additional benefits. For each year a worker elects to put off receiving benefits between full retirement age and age 70, the monthly benefit increases by 8%. That means that if you were born prior to 1955, you can collect up to 132% of your full monthly benefit amount by delaying your payments. If you were born during or after 1960, you can collect up to 124%.
Boosting your Eligibility
The amount of Social Security you are eligible to collect is calculated based on your 35 highest earning years. If you have not earned income during at least 35 years of your life, then zeroes are averaged into the calculation to stand in for the non-earning years. Consequently, continuing to work later in life can increase your benefits in multiple ways. First, delaying payments increases your benefit amount, as discussed above. Second, the closer you come to having 35 years of earned income, the fewer zeroes and the more earnings are averaged in. As you may remember from your school days, zeroes will kill your grade – the average between an A and a zero is an F. Likewise, years of zero earnings will significantly impact the average of earnings that the Social Security Administration (SSA) uses to calculate your benefit.
Finally, even if you have earned income during at least 35 years of your life, your earnings were probably much higher (adjusted for inflation) late in your career than when you were just starting out. If you can add some high-earning years to your calculation, those will be used in place of your lower-earning years in determining your benefit amount. Extending your career, therefore, gives you the added security not only of the income you earn at the time, but also of securing a higher level of income after you stop working.
How to Claim
There are a variety of ways you can claim Social Security benefits. Married couples have even more choices than singles. Married people may claim benefits either based on their own earnings or on half of their spouses’ earnings (or former spouses’ earnings, if they were married for at least ten years). Many married couples use the “file and suspend” strategy to maximize their total payout. This involves the higher-earning spouse filing for benefits at full retirement age but suspending payments until up to age 70. This allows the lower-earning spouse who is at full retirement age to collect the full spousal benefit while allowing the higher-earning spouse to continue to earn credit for delaying payments. The lower-earning spouse may also elect to take reduced payments on the spousal benefit as early as age 62. Speak to your financial advisor about whether and when a file and suspend strategy would be best for you and your spouse.
Boelman Shaw Capital Partners provides our Des Moines area clients with professional retirement planning services. If you have questions about how best to apply for your Social Security benefits, give us a call. We will give you personalized advice based on your unique needs and financial situation.
Material discussed herein is meant for general illustration and/or informational purposes only. Because individual situations will vary, the information shared here should be used in conjunction with individual professional advice.
Image: By Social Security Administration [Public domain], via Wikimedia Commons