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Social Security payments are the primary source of income for many retirees. Nearly one-third of respondents to a 2013 survey by the Federal Reserve Board indicated that they had no retirement savings. Whether Social Security will be your sole means of support or a source of pocket change, it’s a good idea to strategize how to get the most out of your benefits — before you hit retirement age.
WORK FOR 35 YEARS OR MORE
Throughout your working years, the Federal Insurance Contributions Act (FICA, as it appears on your pay stub) taxes part of your wages that count as credit toward Social Security. The Social Security Administration determines your monthly benefits based on how much you earned during your 35 highest grossing years before you file a claim. The calculation also factors in your age and the number of years you worked. The result is known as the primary insurance amount, or PIA. Check the official online estimator to see how these numbers work out for you.
WAIT UNTIL FULL RETIREMENT AGE
In a recent survey by MassMutual Life Insurance Company, more than 70 percent of respondents incorrectly assumed the retirement age was 65. Full retirement age is 66 for people born between 1943 and 1954 and rises incrementally to 67 for those born in 1960 and after. Although you can start collecting Social Security benefits when you turn 62, the amount of your monthly payment is reduced permanently by 25 percent.
DELAY UNTIL AGE 70
The maximum payout at full retirement age is $2,663 a month in 2015. But most financial planning experts recommend waiting even longer to start receiving benefits. For each year you hold off beyond 66 or 67 up to the maximum age of 70, the size of your monthly payment increases 8 percent. Once the benefit stream starts flowing, regardless of your age, there is no turning back; you cannot change your mind.
MAXIMIZE LIFETIME BENEFITS
The first Social Security payout is the base line for what you will receive every month thereafter. Each October, the Social Security Administration calculates a cost of living adjustment, based on changes in the federal consumer price index, and increases your monthly benefit accordingly for the following year. In 2015, the adjustment amounted to 1.7 percent. When you delay Social Security payments beyond the minimum retirement age of 62, the cost of living adjustments you “missed” are factored into the benefit you ultimately receive.
CONSIDER YOUR LIFE EXPECTANCY
The decision to stop working is, of course, a very personal one. There are many factors to consider when assessing the right time to push “go” on Social Security, including the question with an unknowable answer: How long will you live? Although waiting longer to collect benefits increases the monthly payout, it may not make sense for you. If your health is poor, it may be more prudent to start receiving Social Security now. And if you find yourself in financial straits once you hit retirement age, collecting a smaller benefit for a longer period might be the wiser (and necessary) choice.
BRIDGE THE GAP
It’s possible to retire at 62, delay collecting Social Security, and still maximize your financial situation. Depending on the size and nature of your retirement savings, you could draw on investments, particularly those made through a tax-deferred account such as a traditional IRA or 401(k), until Social Security checks start flowing. Research by a consulting firm that partners with Kiplinger suggests that waiting on Social Security could be more beneficial than limiting withdrawals from a private retirement account. That is, you would wind up with a larger Social Security benefit and likely extend the longevity of your retirement account. This is a very complicated calculation that depends in part on the type of investments you have and is best discussed with a financial planning professional.
LIMIT POST-RETIREMENT EARNINGS
You can keep your job after hitting age 62 and still collect Social Security, but there is a penalty for doing so. Until you reach full retirement age, the Social Security Administration (SSA) will deduct $1 from your benefit for every $2 you earn above $15,720. If you are working the year you reach full retirement age (66 or 67), SSA will deduct $1 for every $3 earned above $41,880 before your birth month. These deductions are temporary; when you stop working, the SSA will recalculate your benefit based on earnings and the benefits withheld. If you work beyond full retirement age, you can collect the full benefit regardless how much you earn.
CLAIM SPOUSAL BENEFITS FIRST
Being married has its advantages as far as Social Security is concerned. When one spouse files for benefits, the other may collect up to half that amount, assuming both spouses are at least 62. This is a boon to couples where one spouse didn’t earn any credits toward Social Security or earned significantly less than the other. For example, if a husband and wife retire at 66 with full retirement benefits — she at $1,500 a month and he at $600 a month — he can file for spousal benefits worth $750 instead of his own Social Security. Meanwhile, the value of his benefits continue to increase until age 70; at that point, he will receive the greater of the two. Note that spousal benefits are reduced for people younger than full retirement age.
‘FILE AND SUSPEND’
This tactic for maximizing spousal benefits pays off most when one half of the couple has reached full retirement age with accrued earnings that exceed those of the other spouse. The high-income earner can file for Social Security and immediately suspend the benefits flow. The lower-earning spouse, who must be at least 62, can then file for spousal benefits while the value of the higher earner’s benefits continue to grow until he or she reinstates the claim (ideally at age 70).
APPLY FOR SURVIVORS BENEFITS
A surviving spouse at least 60 years old can collect a percentage of a deceased spouse’s benefit. By waiting until full retirement age, the surviving spouse would receive a higher benefit — up to 100 percent of the deceased’s benefit, depending how old the deceased was when Social Security payments started. Survivor benefits are available even if the deceased was not yet receiving checks from the Social Security Administration. If both spouses are retired and collecting Social Security, the higher benefit is the one that endures regardless which half of the couple lives longest.
MINIMIZE YOUR TAX BURDEN
Once Social Security benefits kick in, recipients with income over certain thresholds must pay the tax man. (Income here includes variables such as wages, capital gains, dividends and interest payments, payouts from retirement accounts, and one-half of Social Security benefits.) A married couple with income between $32,000 and $44,000 owes taxes on up to half the value of their Social Security benefits. Income exceeding $44,000 incurs taxes up to 85 percent of the annual benefit. For single recipients, the outside income thresholds are $25,000 and $34,000.
START PLANNING NOW
Consider working with a financial planner who knows the ins and outs of the system to customize a plan for you. Barring that, free online tools from the likes of AARP and T. Rowe Price, an investment management firm, can help you optimize your Social Security benefits.
Written by Elizabeth Sheer of Cheapism