Social Security provides a critical baseline of expected retirement income for many Americans. Here are TEN considerations to help maximize the value of your benefits.¹
1. Carefully choose your retirement age
Knowing your full retirement age, the age at which you may first claim benefits without incurring any reduction in amount, is critical. You may start receiving benefits as early as age 62 or as late as age 70. Social Security benefits are calculated to give you about the same total over your lifetime, regardless of whether you choose early or late retirement. If you retire early, the monthly benefit amounts will be smaller to take into account the longer period you will receive them. If you retire late, you will get benefits for a shorter period of time but the monthly amounts will be larger to make up for the months when you did not receive anything. Go to the Social Security website to find a listing of full retirement age by year of birth.
2. Determine the amount of your benefit
The general determinants of your benefit will be your age, your earnings history and type of benefit. You need 40 work credits ( ten years of work) to qualify for Social Security retirement benefits. The amount of your retirement benefit will be based upon the 35 years of work ( not needed to be consecutive) in which you had the highest earnings. You may use the Social Security Retirement Estimator to get an idea of what your projected benefit might be.
3. Understand Social Security benefits and inflation
Social Security has a built in cost of living adjustment or COLA based upon an annual review of an index of consumer prices.
4. Maximize your family benefits
Once your spouse applies for his or her Social Security benefits you may elect to receive a spousal benefit based upon their income, rather than your own. You may be entitled to take up to 50% of your spouse’s benefit amount in lieu of your own. The amount of the spousal benefit will be based upon your age and may be influenced by pensions you have outside of Social Security. To read more about spousal benefits, click here.
5. Eligibility for the Social Security Survivor benefit.
A widow, widower or child of the deceased may be eligible for Social Security benefits. If you are at full retirement age, the survivor benefit is worth 100 % of what your spouse would have received. If you remarry after the age of 60, you may still be eligible for survivor benefits.
6. Your ex-spouse may receive benefits.
Your ex-spouse can receive benefits based on your record (even if you have remarried) if the following criteria is met:
- your marriage lasted 10 years or longer,
- your ex-spouse is unmarried and is 62 or older,
- the benefit that your ex-spouse is entitled to receive based on their own work is less than the benefit they would receive based on your work;
- you are entitled to Social Security retirement or disability benefits.
If you have not applied for retirement benefits, but can qualify for them, your ex-spouse can receive benefits on your record if you have been divorced for at least two years. If your divorced spouse remarries, he or she generally cannot collect benefits on your record unless their later marriage ends (whether by death, divorce or annulment).
7. A bonus for delaying your claim past full retirement age
Social Security benefits are increased if you delay your retirement beyond full retirement age. The greatest advantage occurs when you choose to claim your benefits at age 70, as the benefit grows at 8% per year from your full retirement age to age 70. Read more
8. Spousal benefit and delayed retirement credits
A high earning individual (HEI) may decide to delay retirement to maximize their social security benefit and allow their spouse to elect a spousal benefit based upon the HEI’s earnings. To execute this strategy the HEI may file for benefits and then elect to immediately suspend payment of those benefits, earning delayed retirement credits for each year until he or she turns 70. However, since they have filed, their spouse may now take a spousal benefit based upon the HEI’s earnings.
9. Social Security benefits are taxable for most individuals
Social Security recipients pay taxes on benefits based on Internal Revenue Service (IRS) rules. The threshold for paying taxes on Social Security income is quite low: for example, you pay tax on 50% of your social security income if you and your spouse report between $32, 000 and $44, 000 in combined income and on 85% of your social security benefit if your combined income is greater than $44,000.
10.Watch out for the earnings test when retiring early.
If you are under full retirement age for the entire year, the Social Security administration will deduct $1 from your benefit payments for every $2 you earn above the annual limit. For 2014, that limit is $15,480.
¹This top ten list based upon 10 things to Know About Social Security, Kiplinger.com, January 2013