Things we love to hate: politicians, bosses, Mondays, and, for some, Social Security. America's financial safety net gets flak for having an uncertain future, providing benefits that don't cover living expenses, and using mysterious abbreviations like FRA and AIME.
Still, some 68 million people receive Social Security benefits today, including 49 million retirees over 65 years old, 13 million disabled workers, and 6 million young survivors and early retirees. And you might join that group of Social Security beneficiaries sooner than you think -- especially if your current retirement plan involves working into your 70s.
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A report from the Employee Benefit Research Institute (EBRI) concludes that 43% of retirees left the workforce earlier than they'd planned. Within that group, 35% cited a health problem or disability that prompted them to stop working ahead of schedule. Another 33% said their retirement was expedited due to changes at their employer. Only one-third of them said they retired ahead of schedule because they could afford it.
In other words, your great health and solid reputation at the office won't last forever. And if something forces you out of work before you've reached your target retirement savings balance, you'll need a backup plan -- which likely involves Social Security. Since Social Security benefits are designed to only replace about 40% of your income, your backup plan should involve maximizing your benefit and reducing your living expenses at the same time.
Maximizing Social Security benefits
Social Security is fairly formulaic. As a general rule, your benefit is based on how much you earned in your working years. There are some nuances to the rules, however, that you can use to your advantage. Here are three ways to increase your benefit.
1. Boost your average
Your Social Security benefit amount is based on your average income in your highest-paid 35 years of working. If you raise that average by increasing your income, your benefit goes up. There is a cap, however. The maximum taxable limit changes from year to year, but it was $132,900 in 2019. Earnings above that threshold don't count in your benefit calculation.
If your current salary is below $132,900, ask for a raise or get a second job. The increase in your income will raise your average in the benefit calculation, which means a bigger Social Security check for you.
2. Delay claiming
If you wait until age 70 to claim, you could raise your benefit by 24% to 32%, depending on what year you were born. Delaying your benefit might seem counterintuitive when you're leaving the workforce earlier than planned, but bigger income later might work in your favor.
Take a look at your retirement savings balance today. If you got fired tomorrow, could you live on your savings until you reach 70? You certainly don't want to run your portfolio dry. But you could take higher distributions from your retirement plan now, and then decrease them later when you start receiving Social Security.
3. Strategize with your spouse
If you are married, you may qualify for a spousal benefit equaling up to 50% of your spouse's retirement benefit. You can't collect two benefits at the same time, but you could claim the spousal benefit now and your own retirement benefit later. That might be the extra income you need to put off claiming your own retirement benefit until you've maxed out the delayed retirement credits at age 70.
You can qualify for the spousal benefit if your spouse is already collecting Social Security, you've been married for at least one year, and you're 62 or older. If you do claim a spousal benefit after age 62 but before your FRA, the benefit amount will be reduced to as low as 32.5% of your spouse's benefit. At your FRA, your spousal benefit is 50% of your spouse's benefit. Spousal benefits do not have delayed retirement credits, so putting off a spousal benefit claim beyond your FRA won't change the amount.
Downsizing your expenses
Once you've formulated a plan to maximize your Social Security benefits, spend some time on your finances. Get in touch with your required monthly living expenses and how they compare to your expected Social Security benefit amount. Know what your shortfall is and decide if your savings can cover it. Or, if you intend to live off your savings for a few years to delay your Social Security benefits, identify how much you'd need to withdraw from your portfolio annually in those first few years.
If your savings and Social Security income combined can't cover your living expenses, you need a downsizing plan. Thinking through your options while you're still working spares you a ton of stress later.
One of the most effective ways to reduce living expenses is to move. Obviously, a smaller home in a cheaper community lowers your rent or mortgage, as well as utilities, insurance premiums, and maybe even your maintenance costs. If you own your home, figure out how much cash you'd generate from selling the house and paying off your mortgage. Circle that number as your target budget for a smaller home, if it's realistic -- that would leave you with no mortgage payment at all. On a fixed income that's heavily reliant on Social Security, you'll appreciate being mortgage- and rent-free.
Start researching home values in your neighborhood and in nearby communities. Also, broaden your search to cities around the U.S. that are known for their low costs of living. You could even plan some weekend trips to visit these cities while you're still working to see if they might be a fit for you to relocate.
Enjoy your retirement
Here's the funny thing about taking a deep dive into retirement planning: You may decide you don't love the idea of working until you're 75, and you actually can afford to retire early. Sure, a lifestyle change might be in order. But you'll be free of bosses and workdays, and that trade-off just might be worth it.
