If you or your spouse has worked in the private sector or is self-employed, Social Security retirement benefits are an important asset that can greatly impact your financial well-being and afford you a more comfortable lifestyle once you leave the workforce. Monthly Social Security checks also provide a critical safety net for the many Americans who now depend on it as a major source of income — even though it was initially intended to replace only about 40% of one’s pre-retirement income. Given the many rules and complexities governing Social Security retirement benefits and how they pertain to different individuals and couples, it’s critical that you evaluate your options within the context of your unique financial situation. However, these pointers can provide a starting point to help you maximize your income in retirement, which may mean the difference between hundreds of thousands of dollars:
Pay into Social Security for a minimum of 35 years
You only need to pay into Social Security for 40 quarters (10 years) to be eligible to receive retirement payments, but it’s important to keep in mind that your earnings’ history is a key factor that will impact the amount of money you will receive from Social Security. As explained by Katie Brockman from the The Motley Fool, your basic benefit amount is calculated according to the average of your 35 highest-earning working years. If you work fewer than 35 years, your non-working years will lower your average because they will add zeroes to the equation. You can increase your benefit amount by continuing to work the full 35 years. Continuing to work until you’ve paid into Social Security for 35 years will be even more advantageous if your current earnings are higher than what you received in earlier years. This is because each additional year of earnings can replace a year of lower earnings when determining your 35 highest-earning years. After you’ve paid into Social Security for 35 years, you can continue to raise your retirement income by working at a higher income level to bring your average up.
Don’t dip into funds early if it can be avoided
Most people can start receiving Social Security retirement benefits as early as age 62, but will miss out on a significant amount of money they could receive had they waited longer. Generally speaking, you can collect your full benefits once you reach what the federal government refers to as full retirement age (FRA). Your FRA is determined by the year you were born, and as SmartAsset explains, falls somewhere between 65 and 67. To easily find your full retirement age, use the Social Security Administration’s online “Retirement Age Calculator.”
If you claim your benefits before your full retirement age, you’re eligible to receive what’s referred to as partial retirement benefits. Essentially, your monthly checks will be for an amount smaller than what you would be entitled to receive at FRA. The earlier you claim your benefits before full retirement age, the less money you will receive. This is because the Social Security Administration reduces your monthly payments by a certain percentage for each month before full retirement age that you claim benefits. For instance, someone with a normal retirement age of 67 who collects benefits at age 62 will receive 30 percent less than the full benefit amount they would receive if they had waited until turning 67. This same person who waits one year and six months longer to tap into these funds would receive 22.50 percent less than the amount of their full benefits. The Social Security Administration provides a helpful chart that details how this process works, which you can access here (just select your category for year of birth for details).
Further boost your Social Security income by holding off until age 70 to collect your benefits
The advantages of waiting to claim your benefits don’t stop at full retirement age. After you reach FRA, your benefits will continue to grow until age 70 if you don’t collect them before this time. In other words, the longer you delay receiving benefits until age 70, the more you will increase the size of your checks once you do begin to draw upon them. Especially if you believe that you or your spouse will have a longer than average life expectancy, it can make good sense to delay your benefits until this time.
Writing for Consumer Reports, Tobie Stanger touts the advantages of waiting until age 70 to claim your benefits, “If you’re currently at the full retirement age of 66, for instance, waiting until you’re 70 years old to claim will raise your retirement benefit a guaranteed 8 percent annually.” For critical insight into the decision to wait until age 70 to claim your Social Security retirement benefits, check out “Does Delaying Social Security Deliver an 8% return?” from Christine Benz at Morningstar. And as Smart Asset points out, those who have started collecting benefits between full retirement age and age 70 can choose to suspend payments in order to increase the size of their checks at a later date.
Coordinate benefits with your spouse and claim your spousal benefit or survivor benefit if it makes sense for you
Although spousal benefits are often overlooked, both current spouses married for at least one year as well as ex-spouses who have been married for over ten years and have not remarried are eligible to receive spousal benefits. Claiming a spousal benefit can be advantageous for those who have not paid into Social Security for the minimum time to collect benefits, or for those whose earnings were substantially less than those of a spouse.
Spouses can receive up 50 % of your partner’s Social Security retirement benefits by collecting benefits at full retirement age or older. What’s more, claiming a spousal benefit does not change or reduce the amount your spouse will receive. Unlike those who are divorced, current spouses must wait until their spouse claims benefits to be eligible. However, ex-spouses must have been divorced for at least two years before collecting benefits.
The death of a spouse can also mean a change in your benefits. In this event, you may be entitled to receive a survivor benefit equal to the full benefit your spouse received. An ex-spouse can also claim survivor benefits under certain circumstances. Find an excellent overview of Social Security spousal benefits from Dana Anspach at The Balance.
If both you and your spouse are eligible to receive retirement benefits from Social Security but one person earned a substantially higher income, you’ll want to explore your options in order to optimize your income in retirement. The rules are more complicated in this situation, and have changed in the past decade. In some cases, it may make sense for the spouse that made less money to claim a spousal benefit instead of collecting their own benefits, or to file a “restricted application” to claim a spousal benefit initially, and delay receiving benefits based on their own earnings, so that these benefits can continue to grow. However, this “restricted application” claim is not available to everyone. A law enacted in 2015 limited he right to file a restricted application for those born prior to .January 2, 1954. Consumer Reports recommends consulting the Social Security Administration’s calculators to help you to determine the best options for social security benefits for couples.
Finally, don’t overlook the fact that Social Security benefits are taxable. Depending on your income and tax status, anywhere from 50% to 85% of your benefit payment could be subject federal taxes. Your tax liability is an important consideration as part of any financial planning strategy, so it’s advisable to seek help from a qualified professional who can evaluate your choices in terms of its impact on your overall financial picture. If you’re ready to work with a trusted advisor for financial goal setting and long-term planning, The Police Credit Union can help through our Members Financial Services program in partnership with CUNA Brokerage Services, Inc, an affiliate of CUNA Mutual Group. Visit us at www.thepolicecu.org/investments for details.