Social Security is undeniably one of the most ubiquitous sources of income for retirees.
According to the Social Security Administration's June 2015 Fact Sheet, nearly 9 out of 10 individuals aged 65 and older are receiving Social Security benefits, and among elderly beneficiaries, 53% of married couples and 74% of unmarried persons are receiving at least half of their income from Social Security. This is in line with the nearly 60% of seniors who told national pollster Gallup that Social Security comprised a "major" part of their monthly income.
In short, Social Security income is vital to the well-being of our nation's retirees.
Unfortunately, the Social Security program isn't in the best shape. A flood of baby boomers are retiring on a daily basis, swelling Social Security's beneficiary numbers, and people are also living longer than ever. The average life expectancy in the U.S. has jumped about nine years since the mid-1960s, based on data from the Centers for Disease Control and Prevention. This is straining the program, with the spare cash in the Trust's reserves forecast to be depleted by 2034. Assuming Congress takes no action to collect more revenue, benefits could be slashed by as much as 21% for this retiree-critical program.
How to get more money from Social Security
That's why it's important that Americans understand how to get as much as possible out of Social Security once they retire. If you're looking to get more money from Social Security, here's your game plan.
The easiest way to get more money out of Social Security is to work for a minimum of 35 years. The reason for this is because the Social Security Administration determines your benefit by averaging your 35 highest-income years. If you haven't worked a full 35 years, the SSA will average in $0 for each year under 35, dramatically reducing your annual average income and thus reducing your benefit. Working a full 35 years should help maximize your benefit, and working into your 60s could allow you to replace one of your lowest-earning years with a much higher-earning year, also raising your benefit.
Wait to file
Another easy way to get the most out of Social Security is to simply wait to file for benefits.
Senior citizens become eligible to file for and receive Social Security benefits at age 62, which is what about 45% of retirees choose to do. The problem with taking benefits early is that it means receiving a reduced benefit. You're entitled to 100% of your benefit once you reach your full retirement age (FRA), which is a dynamic number based on the year you were born (for future retirees, it's age 66 or 67). Depending on whether your FRA is 66 years or 67 years, taking benefits at age 62 could reduce your benefit by 25% to 30%.
However, for each year you wait to file, your eventual Social Security benefit increases by about 8%. This increase in benefits is realized annually up until age 70. This means waiting until age 70 with an FRA of 66 years could result in a payment equal to 132% of what you'd have received at full retirement age.
Coordinate benefit claims with your spouse
Formulating a retirement plan with your significant other can also help you get more money out of Social Security.
Although your Social Security benefit is derived from your work history, your spouse and children could be affected positively or negatively by when you choose to claim benefits. Remember, Social Security pays out more than just retired worker benefits. It also pays survivor benefits to the spouses and/or children of deceased workers. The earlier you claim benefits, the smaller the survivor benefit paid to your spouse or kids will be. Conversely, the later you claim, the bigger their survivor benefit will be.
Beyond just survivor benefits, coordinating with your spouse can help maximize income for a married couple. In instances where one spouse has made far more than the other over his or her lifetime, it's beneficial for the higher-earning spouse to hold off on filing for benefits while having the lower-earning spouse file early in order to generate some income for the household. Coordinating things this way allows the higher-earning spouse's benefit to grow at 8% a year, thus packing quite the punch once he or she hits full retirement age, or even age 70, and files for benefits.
Get married and/or stay married longer
An interesting way to potentially boost your ability to earn more from Social Security is to get married, or at least stay married for a long time.
As noted above, getting married can give you access to the survivor benefits of your spouse, which may be higher than the benefit generated from your own work history. You only need to be married for nine months before survivor benefits kick in should your significant other pass away.
Divorcees are also entitled to spousal benefits from their ex as long as their marriage lasted at least 10 years. In order to receive benefits from an ex-spouse, you'd need to:
- still be unmarried,
- be at least age 62,
- have your ex-spouse be at least age 62,
- and the benefit based on your own work history would have to be less than the benefit you'd receive based on your ex-spouse's work history.
For low-income divorcees with a wide lifetime earnings gap compared to their former spouse, this clause can help you get a lot more out of Social Security.
Contribute to a Roth IRA
Finally, opening and contributing to a Roth IRA can help boost what you get out of Social Security.
A Roth IRA is arguably America's greatest retirement tool for one big reason: Investment gains earned within a Roth are completely free of taxation for the life of the account. This matters because Social Security benefits are taxable.
Congress hasn't changed the tax laws surrounding Social Security benefits in a long time, meaning that individuals earning more than $25,000 annually and couples taking home more than $32,000 each year could have up to 50% of their Social Security benefits taxed by the federal government. Roth IRA income, though, doesn't count toward this income limit since it's not taxable. This means potentially avoiding having to pay tax on your Social Security benefits regardless of how much you withdraw from your Roth IRA. And keeping more of your benefit payments probably sounds better than handing it back over to the federal government.