I’ve written in the past about what an incredible benefit Social Security is for retirees. In a previous article, I didn’t pull any punches in calling social security “America’s most important retirement plan.”
There are a lot of reasons why. First, basic eligibility is easy to achieve for most Americans able to work. Second, it’s an income stream guaranteed by the US government. Third, it pays a benefit to spouses who haven’t worked or who have worked too little to earn their own benefit. Fourth, it increases with the cost of living over time.
While most of us are aware of the benefits of Social Security, I find that fewer people know how to get the most income from it. Here are four primary ways to get the most from your Social Security benefit.
1. Earn more money
To determine your monthly benefit, the Social Security Administration looks at how much you’ve earned. Generally, the more money you earn the higher your benefit will be, up to the taxable wage base. In 2019 (the year of this article’s publication), the taxable wage base is $132,900. This means that any dollar you earn over $132,900 won’t be subject to any additional Social Security taxes nor will your benefit increase any further. However, this also means that if you earn, say, $75,000 per year, earning more can increase your Social Security benefit.
Determining how much your benefit will increase requires some assumptions and tricky calculations, but it’s important to realize the impact even small increases can make over time. Suppose you’re able to negotiate a pay increase which raises your monthly benefit by $150 per month. If your full retirement age is 67 and you live until age 92, this translates to an additional $1,800 per year, or $45,000 over the rest of your retirement.
If you’d like to do some calculations to help determine how much your benefit could increase, I encourage you to check out some of the Social Security calculators linked here.
2. Wait until age 70 before claiming your benefit
According to recent findings in the University of Michigan’s Health and Retirement Study, 79 percent of American’s claim their Social Security benefit between the ages of 62 and 64. This means the vast majority of Americans don’t even wait until their full retirement age to claim their benefit, resulting in a lower benefit overall.
The temptation to claim one’s benefit early is understandable. Once eligible for Social Security, you’ve likely worked 35 years or more and you’re eager to claim what’s yours. But waiting can make a huge positive impact on your overall benefit. Not only will you receive a higher benefit by waiting until your full retirement age (67 for most of us), but your benefit can increase even further if you wait until age 70...to the tune of a 32% increase. This means if your full retirement age benefit is $2,500, your benefit at age 70 could be $3,300...a monthly increase of $800.
This translates to an annual increase of $9,600 per year, or an additional $240,000 over the rest of your retirement (assuming a retirement time span of 25 years).
Your benefit can increase even further if you wait until age 70...to the tune of a 32% increase!
I acknowledge that waiting until age 70 isn’t for everyone. For example, if you’re in poor health or don’t have other retirement assets (like a 401k) to live on while you wait, it can make sense to claim earlier. But I believe that for many families, these are exceptions. Most retirees should strongly consider waiting until age 70 to claim. It makes too much financial sense to do otherwise.
3. Consider your spousal benefit vs. earner benefit
Anyone considering claiming their Social Security benefit has two options. They can claim their earner benefit (the benefit they’ve earned based on their taxable wages over time), or they can claim their spousal benefit (which is ½ of the household’s earner’s benefit). In many cases, a couple can download their latest Social Security statement online and see whether it makes sense to claim their earner benefit or their spousal benefit. But this decision isn’t always clear-cut.
For example, consider a husband and wife couple. The husband has historically been the primary earner in the family. He’s worked at the same job for most of his career and received cost of living wage increases over that time. The wife worked at a bank from age 21 to 25, but most of her earning years are at zero since after age 25 her time was spent at home raising their children.
Suppose at age 50, the wife starts to work professionally and the kids are out of the house. The wife, in this case, could have an additional 17 years of earnings by the time she claims her benefit. Depending on how her earnings compare to her husband’s, it’s not impossible for her Social Security benefit to exceed half of her spouse’s benefit, making it more lucrative for her to work and claim her own earner benefit rather than simply claiming her spousal benefit.
It’s worth the effort to think through the pros and cons of claiming your spousal benefit rather than earning your own benefit.
4. Follow the “Thrive at 35” rule
How exactly does the Social Security Administration determine what your monthly benefit will be? The answer is complex and outside the scope of this article, but one of the key factors (in addition to how much you earn, see #1) is how many years you work. The Social Security Administration looks at your 35 highest earning years to help determine your final monthly benefit. I call this the “thrive at 35” rule. If you’ve only worked 30 years, working another 5 can make a big impact on your benefit. Otherwise those missing 5 years of earnings are considered years when you earned zero.
Also, note that earlier I said your “highest” 35 years. This means that if you’ve worked 40 years and if during years 36 to 40 you earned more than years 1-35, those later, higher earning years can replace some of your lower earning years.
An example of a worker’s 40 year earning history (with zero earnings in years 1986 through 1990). The higher earning years between 2016 and 2020 can replace the zero earning years, raising this person’s Social Security benefit.
I don’t know about you, but in my case I had some years where I didn’t earn much money at all (especially as a new college graduate) and even a year or two of unemployment. Replacing a low or zero earning year with one where you’ve earned much more can make a big difference to your overall Social Security benefit.
I hope this article has been helpful to you. It’s worth the effort to get your Social Security benefit right. While it should only make up around 30 to 40% of your total income during retirement, for many of us it may need to make up substantially more than that. In this case, it makes sense to try to maximize this benefit as much as possible by earning more taxable wages, waiting until age 70 to claim your earner benefit, consider the spousal vs. earner benefit, and get at least 35 years of earnings before you claim your benefit.
If you’d like help considering the ins and outs of your own, personal Social Security situation, please contact me.