There's an old joke about Social Security I wanted to tell -- but then I realized no one will get it.
Social Security's long-term solvency may be the butt of a few jokes, but you can't question this: The federal retirement program is currently keeping nearly 15 million retirees out of poverty. And millions more rely on Social Security to supplement their income from savings and protect their lifestyle after leaving the workforce.
Regardless of whether your Social Security benefit will be a major or minor source of your retirement income, it's important to know the basics of the system. That'll help you maximize your benefit and avoid filing pitfalls that you'll regret later. Here are six Social Security rules to memorize right now.
1. You can claim at age 62
Social Security assigns you a Full Retirement Age, or FRA, based on the year you were born. For everyone who isn't already retired, that age is somewhere between 66 and 67. At FRA, you are eligible to receive your "full" Social Security benefit, which is the amount that's calculated from your earnings history. If you don't want to or can't wait until FRA, you can claim as early as age 62, but your benefit amount is discounted.
The discount formula works like this:
- For each of the first 36 months you claim before FRA, the benefit is reduced by five-ninths of 1%.
- If your claim is more than 36 months before FRA, the monthly benefit is further reduced by five-twelfths of 1% for each month over the initial 36.
2. You can delay your claim until age 70
You can get the maximum monthly retirement benefit by waiting until you're 70 to claim. For every year after FRA that you delay claiming, your benefit is increased by 8%. There's one catch, though. You must have fully qualified for Social Security prior to FRA. That means you've worked and paid your Social Security taxes for at least 10 years. If you're still in the process of qualifying after FRA, you aren't eligible for the increase.
3. Your lifetime benefit doesn't change based on timing
Whether you claim early or late, your lifetime benefit should be the same. If you claim at 62, you get a longer stream of smaller payments. And if you claim at 70, you get a shorter stream of larger payments. But the formula is designed so that the cumulative payout is the same no matter when you claim.
What does this mean for you? If you have a reason to claim early -- say, a job loss or health concerns -- you can do it without feeling like you're being financially irresponsible or leaving money on the table.
4. Your spouse can claim based on your earnings
If you qualify for Social Security benefits, your spouse of one year or more can claim based on your earnings history. The amount paid to your spouse will be either what the spouse earned from working or up to one-half of your benefit at FRA, whichever is higher. Your spouse can start receiving those benefits at age 62, assuming you are receiving or are eligible for benefits. Any spousal benefits do not change the monthly amount you receive.
5. You get a do-over
What if you claim your benefit at age 64 and then get an awesome job opportunity that you don't want to pass up? Social Security does allow you to withdraw your application within 12 months of filing. There are three points to understand here. One, when you withdraw, you have to repay any benefits you or anyone in your family received from your retirement application. Two, any family member who received benefits based on your earnings record, usually your spouse, has to consent in writing to the withdrawal. And three, this is a one-time deal. You can't withdraw, refile later, and then withdraw again.
6. You can work the formula to increase your benefit
Unfortunately, there isn't a secret loophole that will dramatically increase your monthly Social Security benefit. But the next best thing is knowing how the benefits formula works and using it to your advantage.
Your Social Security benefit at FRA is based on an average of your monthly income, taken from your highest-paid 35 years of working. If you have fewer than 35 years of work history, the missing years are included in the average calculation as zero income. Every extra year you work at that point replaces one of the zeroes, increases your average, and raises your benefit.
And even if you do have 35 years of working under your belt, you can still increase your average and the resulting benefit -- usually just by continuing to work. This holds true if your current salary is high enough to replace a lower income year on your earnings record. You can view your earnings record by creating an account at the "my Social Security" website. If your salary today is higher than any year on your earnings record, continuing to work will raise your benefit.
The only time this strategy wouldn't work is if you've already earned the maximum Social Security benefit possible, which is uncommon. That happens when your salary has met or exceeded the maximum taxable earnings for 35 years straight. In 2020, that maximum is $137,700.
Work the timing and income for maximum benefits
There's one more thing to know about Social Security. The program is projected to be fully solvent until 2035. And you can bet politicians will step in and protect your retirement benefit in the years after 2035. So, make the jokes, but don't sit idle. You can get the most from your federal retirement insurance by understanding how timing affects your monthly benefit, what rights your spouse has based on your earnings record, and how your income today can support a higher Social Security check later.