[Note: As most of you know, I’m a financial adviser. I use a program called Social Security Timing to help clients determine the best Social Security strategy for their situation. I’ll run that report for free for the first 20 of my readers (that’s you!) who request it. Certain conditions apply, so just email me if you’re interested (firstname.lastname@example.org).]
Social Security is a major source of income for many retirees. How major? The average retiree gets about 40 percent of their income from Social Security. For older retirees, that percentage surpasses 50 percent. It stands to reason then that we should all want to maximize our Social Security benefits. Here’s how.
You can choose to claim your benefits early, on time or late. “On time” is also known as your full retirement age and it varies depending on when you were born. If you were born after 1960, your full retirement age is 67. If you were born between 1943 and 1954, your full retirement age is 66. Full retirement increases by 2 months per year for those born between 1955 and 1959 (e.g. 1957 = 66 and 6 months).
If you claim early, your benefits will be reduced by 5/9 of 1 percent per month for the first 36 months and 5/12 of 1 percent for anything over 36 months. For example, a person born in 1950 who claims at 62 instead of 66 will see his or her benefits permanently reduced by 25 percent.
If you claim late, your benefits will increase by 8 percent per year for each year you wait (for those born after 1943). So if you want to maximize your Social Security, it’s usually best to wait to claim until on or after your full retirement age. One instance where it might make more sense to claim early would be if you are in poor health and don’t expect to live very long.
If you’re still working and haven’t reached your full retirement age yet, you should think twice before claiming benefits. That’s because your Social Security check will be reduced by $1 for every $2 you earn above $15,120 (for 2013). In the year you reach full retirement age, the penalty is reduced to $1 for every $3 above $40,080.
Unlike the penalty for claiming early, the work penalty is not permanent. It goes away once you reach full retirement age and your benefits will be increased to compensate you for the prior reduction. But that doesn’t really help you if you claim early thinking you’re going to supplement your paycheck, only to have those benefits withheld because you make too much money.
Coordinate with your spouse
When claiming, both you and your spouse have a variety options. Add to that the fact that you are typically entitled to either the benefits you earned yourself or an amount equal to roughly half of your spouse’s benefit and the complexity multiplies quickly. If you can coordinate your claiming strategies, you can greatly increase your lifetime benefits. I have seen couples increase their lifetime benefits by $100,000 or more simply by having a well thought out, coordinated strategy.
Don’t forget your Ex
If you’re divorced and haven’t remarried, you may be entitled to claim benefits based on your ex-spouse’s record. The primary stipulations are that a) you were married for more than 10 years, b) you haven’t remarried and c) you’re older than 62.
So there are a few ideas for maximizing your benefits. Don’t forget to touch base if you want me to run the Social Security Timing report showing you the best strategy for your situation.