There’s an old saying: “Everybody complains about the weather, but nobody ever does anything about it.” Unlike the weather, you can do something about your Social Security benefit. It involves which claiming strategy you choose. Don’t underestimate the importance of this decision. The strategy you choose can make a vast difference in the ultimate benefit you receive — especially if you live a long time in retirement.
Here, we’ll review some of the most basic variables that you can work with to change the size of your benefit. But you should know there’s much more to the subject, including your health and family circumstances. That’s why you should consult with a bona fide Social Security expert, as well as with the Social Security Administration itself, when you’re preparing to make important decisions.
Everyone has a story, and the details of that story determine the size of your Social Security benefit. Let’s say you’re single, always have been and always will be. If that’s your story, your choices are much less complicated than would otherwise be the case. Aside from how much you’ve earned over your lifetime, the two main things that impact your benefit as a single person are:
1. How many years you have worked by the time you retire, and
2. The age at which you start collecting benefits.
Both variables also apply to married or formerly married people, though there are other factors to consider. (We’ll discuss this more later.)
Regardless of your marital status, the amount of your retirement benefit will be based, in part, on your highest 35 years of earnings. Suppose you work only 32 years. The formula used to calculate your benefit will include three years of zero earnings, and your benefit will be lower. Or, let’s say you work 37 years. In that case, your lowest two years of earnings will drop out of the formula and your retirement benefit will be higher.
Regarding the age at which you retire, it often — but not always — pays to postpone filing for Social Security benefits. If you opt to file as early as possible, at age 62, your monthly benefit will generally be 8% lower per year than it would be if you delayed the process. Suppose your full retirement age (the age at which you would receive full benefits) is 67. If you start taking benefits at age 62, you’ll only get about 60% of what you would have received five years later (8% times five years results in a 40% reduction).
Similarly, for every year that you postpone claiming Social Security, the size of the benefit goes up by 8%. However, at age 70 the growth stops. So, if your full retirement age is 67 and you wait to claim your Social security benefits until age 70, your monthly check will be 24% higher (8% per year for three years).
This assumes you can afford to put it off by tapping savings, postponing retirement or some combination of the two. Of course, that’s not financially feasible for everyone. Also, whether you come out ahead or not by deferring your benefits will depend on how long you live. After all, if you don’t start collecting Social Security checks until, let’s say, four years later than you could have, you’ll need some time to recoup those foregone benefits.
The Health Factor
Basically, if you’re healthy and have no reason to expect that you’ll pass away earlier than a normal age (and, if that ultimately becomes reality), you come out ahead by postponing benefits. If you do have serious health concerns, pushing back your benefits might not work in your favor.
For perspective, the Social Security Administration’s actuarial tables state that the average 65-year-old man today will live to be 84.3, and the average 65-year-old woman will live to be 86.6. Presumably those assumptions determine how the agency decides how much to incentivize people to postpone taking their benefits.
Note: If you started receiving benefits at age 62, you could decide to suspend receiving benefits until you’re 70. By doing that, you’d recoup some of the “loss” you incurred by beginning to receive benefits at age 62.
Claiming strategies for married couples are more varied. One decision is whether a spouse should claim a “spousal benefit” or simply claim his or her own. The spousal benefit is equal to 50% of whichever spouse has a higher benefit (assuming the higher-benefit spouse wasn’t already receiving Social Security before full retirement age). That’s usually a fairly straightforward calculation.
The decisions get more complicated when you’re considering survivor benefits. A surviving spouse is entitled to receive the deceased spouse’s benefit in lieu of his or her own, assuming it’s larger. Suppose the spouse that has earned a higher benefit continues to work until at least full retirement age, and then passes way. His or her spouse will later be able to receive a higher survivor benefit.
Other variables, such as divorce, add even more scenarios that raise or lower your potential benefits. That’s why it’s important to consider the details of your story when settling on a claiming strategy. To ensure you receive the maximum benefits you’re entitled to, take the time to explore your most likely circumstances, and plan accordingly — preferably with the help of a trusted advisor.