Please ensure Javascript is enabled for purposes of website accessibility

2 Key Factors to Maximize Social Security

By Diane Mtetwa - May 7, 2021 at 6:10AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Get the most out of your Social Security payments by doing these two things.

Once you've reached the age of 62, you can take Social Security. But when you start, it can have a huge bearing on your monthly income and how much you draw from the system over your lifetime. 

There are a number of considerations that play into when is best for you -- including your need. But if you have flexibility in the choice, these two things will help you maximize this benefit. 

Mature woman with glasses on and holding a laptop.

Image source: Getty Images.

1. Your life expectancy 

You receive your standard benefit if you take Social Security at your Full Retirement Age (FRA), which depending on when you were born is 66, 67, or somewhere in between. If you start it early, it gets reduced and if you delay, it will be increased. 

If your FRA is 66 and the benefit you will receive at that age is $2,000, taking it at age 62 will decrease it by 25% to $1,500. Delaying it to age 70 will increase it by 32% to $2,640. If you live to the age of 75, you will get total payments over your lifetime of $234,000 if you take it at age 62, $216,000 if you take it at age 66, and $158,400 if you take it at age 70. 

If your life expectancy increases to age 80, you receive $324,000 in income from taking it at age 62, $336,000 if you take it at age 66, and $316,800 at age 70. If you make it to age 85, you will get $414,000 in lifetime income if you start it early at age 62, $456,000 if you wait until you are 66, and $475,200 if you begin payments when you are 70. 

The shorter your life expectancy, the more sense turning on this income stream early makes. The average life expectancy in the United States is 77.8 years and if you end up living this long, waiting until your FRA could yield you the most income. But if you have a longer life expectancy, delaying your benefit may work out in your favor. Unfortunately, there is no perfect way that you can determine how long you will live. But there are certain factors that give you a higher probability of a long life, like your family history of longevity and being in good health. 

2. Other assets and income sources

If you decide that delaying Social Security is best but plan to stop working sooner and take your benefits later, you would need your bills funded by some other income source. If you are fortunate, you may have a pension and this could help you accomplish this goal, though pensions aren't as common as they used to be and in 2019 only 12% of American workers had access to one. If you don't fall into this category, maybe you will have a spouse that continues working and can pay all of your bills, which would make waiting for the higher payment more feasible.

If you've saved a lot and can generate enough from your accounts, your retirement assets may also be a viable option. But if you go this route, studies have shown that keeping your withdrawal rate at 4% or under will be your best bet for making this asset last through your entire retirement -- especially if you think you will be using it for many years. 

The higher the rate of return that you receive from your investments, the better the chances are that they can continue growing beyond your 4% withdrawal. For example, if you only earn 3% on your investment assets and on average every year take out 4%, your withdrawals will exceed your rate of return and your money will be depleted over time. But if you earn 7%, you will have 3% growth on average after taking out your distribution.

But a higher rate of return usually means that you are invested in more aggressive holdings. Investments like stocks have more growth potential than safer investments like bonds but they also have more risk. And in retirement, you may want less volatility to lessen losses if a bear market happens. Finding your appropriate mix of stocks and bonds that can also cover your withdrawals and outpace inflation will involve examining your risk tolerances. And if you can't get a high enough rate, you may need Social Security earlier so that you have enough income. 

For the average American, Social Security will cover about 40% of their retirement expenses. But if you can maximize this benefit and get your highest possible payment, it could make up a higher percentage. Some things you don't have control over, like how long you will live. But the more you learn about life expectancy, the more educated of a guess you can make. And with enough time, you can plan on creating alternate income sources in retirement that could make delaying Social Security easier. 

The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/20/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.