You’ve worked as long as you can remember. Starting out, you had so much to learn, and now, here you are—looking at retirement. You’ve come a long way, and so have your contributions to Social Security. All those paycheck deductions have finally added up.
A lot of soon-to-be-retirees are under the impression you simply notify Social Security after your 65th birthday, and the benefits start rolling in. Not so. There are rules to follow. And, as with all retirement income, you need a well-thought-out strategy.
The average full-time employee usually needs a combination of Social Security and other income streams to maintain their standard of living in retirement. In fact, some suggest that, prior to retirement, individuals need to have put away around 10 times their final annual salary.
Know Your Social Security Benefits
One of the most common questions about Social Security is: how are the benefits determined? The short answer: Social Security benefits are calculated by the amount earned for 35 years of work.
If you worked for more than 35 years, your benefits will be calculated by the years you earned the most—increasing your benefits. If you worked for fewer than 35 years, the years you didn’t work up to 35 will be counted as a zero. For example, if you worked 32 years, years 33, 34, and 35 will be counted as zero, lowering your average amount earned and your Social Security payments.
Luckily, working more isn’t the only way to optimize your Social Security benefits. Here are some tips to help receive more money in retirement.
Know Your Full Retirement Age
There are a lot of important ages in your lifetime: Getting your driver’s license at 16, voting at 18, and celebrating your 50th birthday. Retirement has milestones, too. For example, 59 ½ is the age when you can withdraw money from your 401(k) without an additional tax penalty.
For Social Security, the important milestone is your “full” retirement age. This isn’t the age you have to stop working, it’s the age Social Security says you are eligible to receive full retirement benefits. This number depends on the year you were born, and it can impact how much you receive for your Social Security.
Full retirement age was age 65 for many years. However, due to a law passed by Congress in 1983, it has been gradually increasing, beginning with people born in 1938 or later, until it reaches 67 for people born after 1959.
You can find your full retirement age on the Social Security Administration website.
All U.S. workers are eligible to accept Social Security at age 62. But if you withdraw benefits before your full retirement age, your monthly amount is reduced. At 62, your monthly benefits are reduced by 30 percent. This reduction gets smaller the closer you get to your full retirement age.
Delay Your Social Security
By waiting until your full retirement age, you increase your Social Security payments. By delaying your benefits past your full retirement age, you can earn credits that increase your monthly benefit.
Each year you delay Social Security, you’ll increase your monthly benefit by 8 percent.
Each year you delay Social Security, you’ll increase your monthly benefit by eight percent. This increase stops at age 70, when your monthly payout is capped. So, there’s no additional benefit to delaying your Social Security past that age. If you don’t need the money right away, you may be better off taking the payment and putting all (or some of it) into an interest- or income-producing product.
Whether you should take Social Security early, late, or when you’re fully eligible depends on a variety of factors:
- Your current cash needs
- Your tax situation
- Other retirement income sources
- Your future financial needs
- Other financial obligations
- Life expectancy
- Post-retirement work
Coordinate with Your Spouse
In some households, one spouse may not have generated a paycheck—or did so for a few years, instead of decades. Social Security offers spousal benefits to help couples in their retirement. If your spouse opts into this plan, he or she could receive monthly payouts worth up to 50 percent of your full retirement benefit.
As with regular Social Security benefits, spousal payments will be reduced if your spouse claims them before full retirement age.
There’s flexibility in spousal benefits, and making the most of your Social Security benefits requires some strategy. Spouses over full retirement age can claim spousal benefit and then later switch to their own Social Security payments based on work history, which will have grown due to the intentional delay.
The optimal timing for making spousal Social Security claims can be complicated. It not only depends on each person’s work history, but also expectations of future earnings. Talk to a financial professional to help you determine the right strategy for the two of you.
Social Security was created to provide guaranteed income to retirees. It still serves as a valuable income component, but today’s retirees may also require additional retirement income, with Social Security as one part of a diversified retirement plan. Personal savings, income from retirement accounts, and possibly a pension (if one was offered at your place of employment) can supplement the income you receive from Social Security.
Retirement Well Spent® and its affiliated financial professionals are not affiliated with the Social Security Administration or any other governmental agency.