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Considering that the U.S. personal savings rate, according to the St. Louis Federal Reserve, was just 5.5% in November, or about half of what it was 50 years ago, it's no surprise that today's retirees and soon-to-be retiring baby boomers are heavily reliant on Social Security income to make ends meet during retirement.
Data from the Social Security Administration shows that about 6 in 10 retirees rely on Social Security to provide at least half of their monthly income, while a recent Gallup poll implies that more than 8 in 10 baby boomers will rely, at least to some extent, on Social Security income when they retire to meet their monthly expenses.
However, Social Security is something of a mystery to many Americans. Many couldn't pass a Social Security quiz if you asked them to -- and not understanding the ins and outs of Social Security could cost you tens of thousands of dollars, if not more, over the course of your lifetime. In fact, a 2015 quiz from MassMutual Financial Group found that only 28% of 1,513 quiz participants received a passing grade, which was defined as answering seven out of 10 questions correctly. Just one out of the 1,513 participants got all 10 relatively basic Social Security questions correct.
An eight-point Social Security checklist for future retirees
What all pre-retirees and working Americans should have is a checklist of the things they need to know before they enroll in Social Security in order to maximize their lifetime benefits. Though everyone's financial situation is different, the following eight-point checklist would be a pretty good place to start.
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Did you work for at least 35 years?
This first thing you'll want to ask yourself is whether or not you've worked for a minimum of 35 years. Although you only need to work part-time for 10 years to qualify for Social Security benefits during retirement, the goal is to get as big a payment as possible, not the minimum benefit.
The Social Security Administration (SSA) determines your monthly benefit by averaging your income over your 35 highest-earning years and dividing by 12 to get an average monthly figure. If you have less than 35 years of work history, the SSA will average in a $0 for every year below 35, dragging down your annual average income. Sometimes it can be worthwhile to work a few extra years in order to boost your eventual payout, especially if you plan to lean on Social Security income during retirement.
Do you know your full retirement age?
Next, you'll want to locate you full retirement age, or FRA. Your FRA is the age at which you become eligible to receive 100% of the monthly benefit you're due, and it's determined by your birth year.
You'll note in the SSA's full retirement age table that the FRA for those born in 1955 will rise in 2017 to 66 years and 2 months after sitting pat at 66 years for the past 12 years. The basic gist is that if you file for benefits before reaching your FRA, you'll receive a monthly amount that's lower than your FRA benefit. Conversely, if you enroll after your FRA, your benefit will be even higher.
Do you understand the trade-off between filing early and waiting?
The next thing you'll want to understand (which builds off the prior point) is the trade-off between filing for benefits early or waiting.
Social Security benefits can be taken as soon as age 62 and anytime thereafter. Your benefit grows by approximately 8% per year for each year that you hold off on enrolling, with each month offering a slight increment. This means even waiting a few extra months can increase your monthly payout. However, your benefit stops accruing at 8% annually once you reach age 70. Based on your birth year, claiming as soon as possible at age 62 could cut your full retirement age benefit by 25% to 30%. Likewise, waiting until age 70 can boost your payment 24% to 32% above your FRA payout.
The Social Security retirement benefit schedule for people born between 1943 and 1954. Chart by author. Data source: Social Security Administration.
So, should you wait or claim early? This is a unique decision you'll have to make, but as a general guideline, if you're in poor health, can't get a job, aren't reliant at all on Social Security income, or are a considerably lower-earning spouse compared to your partner, claiming early probably makes sense. If you're healthy, have little or nothing saved for retirement, or are a significantly higher-earning spouse, waiting often makes sense.
Are you married?
Another big question mark that'll need answering is whether your Social Security claiming decision bears on you alone or if you're married. If you happen to be married, coordinating a claiming strategy with your spouse is the smart way to go.
For example, a spouse with a substantially higher income who holds off on claiming Social Security can have a big impact on boosting the couple's combined income from age 66-70 onwards. Additionally, the age you claim Social Security can affect your spouse's survivor benefit if you pass away first. If you claim early, your spouse's survivor benefit will be lower, too.
Do you have alternative Social Security options?
Speaking of which, the next factor on your checklist is determining whether or not you have alternative Social Security options beyond just your own work history. If you didn't work or earn much during your lifetime, you may qualify for a larger monthly benefit based on the earnings history of your spouse or your ex-spouse, assuming you were married for at least 10 years. It's important to note that you'll only receive a spousal benefit payment, or a survivor benefit payment, if either is larger than what you'd receive based on your own earnings history.
Does a mulligan make sense?
Did you wind up claiming Social Security early and now regret it? This checklist component is specifically for new enrollees who may not realize there's a "do-over" clause within Social Security.
Form SSA-521 allows beneficiaries to undo their claim within the first 12 months of enrolling as long as they repay every cent the SSA has paid them over that time (as well as anyone who may be receiving payments based on your enrollment). The SSA is very strict on its 12-month limit, but if you land a good job after a long period of unemployment soon after enrolling for Social Security, a mulligan in the form of SSA-521 could be a great solution to allow your benefits to grow once more.
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Have you checked your earnings history?
It's often a forgotten step for even those Americans who understand Social Security's intricacies, but ensure that you double- and triple-check your earnings history with what the SSA has on file. It's not too difficult to fix errors on your earnings history before you retire, but it becomes far more difficult and time-consuming after you've filed for, and begun receiving, benefits. Checking your earnings history can be done from the comfort of your home by setting up a My Social Security Account.
Have you considered taxes?
Last but not least, have you considered the tax implications of your Social Security income? A percentage of your Social Security benefits are taxable if you as an individual earned more than $25,000 in a year, or you've earned $32,000 or more as a joint-filer with your spouse. According to The Senior Citizens League, as of 2015 some 56% of Social Security recipients owed some level of tax on their benefits. This means you'll want to be prepared should Uncle Sam come calling and want some of your benefits back.
If you can confidently answer these questions, you're probably ready to maximize your lifetime Social Security benefits.
