Shame on you. I know what’s going on. You’ve been trashing your Social Security statement without even a glance or second thought. Or maybe you haven’t begun to consider Social Security’s role in your future retirement. After all, as far as you know, Social Security won’t be around when you retire – that’s what you keep hearing on the news, anyway. So, why bother?
Well, I’ve got news for you. Although the future of Social Security is certainly unknown – particularly for today’s millennials – there’s a good chance the program will persist in some form. And since half of Americans 65 and older rely on Social Security for at least 50 percent of their family income, you’d be wise to come up with a strategy to maximize your benefits and give yourself the highest retirement income possible.
Here are four questions to ask yourself if you want to avoid potentially leaving thousands of dollars on the table:
1. When am I eligible to receive Social Security benefits?
The earliest you can start collecting Social Security is age 62. However, you’d be taking a 30-percent cut by doing so. Waiting until full retirement age, on the other hand, entitles you to receive 100 percent of the monthly benefit to which you’re entitled. An individual’s full retirement age is determined by birth year – for American workers born in 1960 or later, your full retirement age is 67.
Depending on your income needs, it’s in your favor to wait as long as possible before collecting. By applying for benefits at full retirement age and requesting to have the payments suspended until age 70, you can increase your monthly check another 8 percent annually through delayed retirement credits. Please note: There’s no advantage in delaying Social Security beyond age 70.
2. How much am I entitled to receive from Social Security?
Social Security payments are based on your 35 highest-earning years. The Social Security Administration applies a formula to your earnings to arrive at your basic benefit or “primary insurance amount.” As workers generally earn more as they advance in their careers, your Social Security benefit should similarly increase. Sign up for a free “mySocial Security” online account to get today’s estimate of your future benefits – and take advantage of the Social Security Administration’s "Retirement Planner" while you’re there.
3. What is my primary Social Security goal?
Your claiming strategy might differ based on your goals. Consider these scenarios:
- Begin receiving benefits as soon as possible. To accomplish this goal, submit your application three months before you turn 62 so that your benefits start around your birthday.
- Receive the highest monthly benefit available to you. To take advantage of delayed retirement credits and grow your benefits, wait to apply until you’ve reached age 70. Doing so would increase a $1,000 monthly benefit (at full retirement age) to $1,240. The difference is even greater for an “early” claimant, whose monthly benefit would be $700/month if he/she started drawing benefits at age 62.
- Maximize your lifetime benefits. Social Security is designed to provide you with roughly the same lifetime benefits regardless of when you start receiving payments, but there could be a significant difference when you factor in life expectancy. If you need the money to pay for living expenses, taking benefits at a younger age would mean receiving payments over a longer time period – but your monthly check would be much lower than if you waited until full retirement age (or even until age 70). Meanwhile, waiting that long to collect may not be feasible depending on your other sources of retirement income, such as your 401(k), individual retirement account or brokerage account. Calculators on the SSA website can help you decide the best option for your situation.
- Maximize the money your spouse receives from Social Security. A spouse who did not work or who has lower lifetime earnings is eligible to receive spousal benefits based on your earnings record. If you’re looking to maximize spousal benefits to help provide for your family after you’re gone, you may want to delay claiming benefits, so your spouse will have a higher monthly income. This applies to both spousal and survivor’s benefits.
4. How does Social Security fit into my overall retirement strategy?
People nearing retirement may want to work an estimated Social Security benefit into their retirement-planning calculations. For example, if you’ve calculated you’ll need a monthly income of $4,000 in retirement, and Social Security will give you approximately $1,000 per month, you need to save and invest enough money to draw $3,000 per month from your other sources.
If you’re within a few years of applying for Social Security, there’s a good chance the rules won’t change before you begin collecting. Beyond that, there could be a reduction in benefits – or maybe not. It’s unknown. According to the SSA, “The law governing benefit amounts may change because, by 2033, the payroll taxes collected will be enough to pay only about 77 cents for each dollar of scheduled benefits.”
For those with a longer time horizon, focus on maximizing your lifetime income while also stashing away as much cash as possible in your work retirement plan.
Here’s the bottom line: If you ignore Social Security and don’t create a plan, chances are you’ll fail to give yourself the highest retirement income possible. So regardless of where you are in your career, do your due diligence and determine a preliminary strategy for your situation based on current Social Security laws.
The SSA website should provide a good starting point, but for a more in-depth look, consult a qualified investment advisor who can design a plan for how Social Security and all your investments will work best together to achieve your retirement goals.
This post is part of Smart401k CEO Scott Hollsopple’s contribution to the U.S. News & World Report Smarter Investor blog series. To view the original article, click here.