This article was updated on April 7, 2018. It was originally published on March 19, 2017.
Social Security pays more than 60 million Americans about $1 trillion in benefits annually. If that sounds like a heck of a lot, it is. But it's less than $16,000, on average, per person.
If you're not already collecting Social Security, you probably will be one day, and it will be an important component of your retirement income. If you want to get as much as you can out of the system, learn a little more about how it works. The following three tips can help you maximize your Social Security benefits.
Tip No. 1: Use the formula to your advantage
You may not have thought about it much before, but you won't be surprised to learn that the Social Security Administration uses a formula to calculate your benefits. Here's what you need to know about it: It's based on the income you earned in your 35 highest-earning working years (with those earnings adjusted for inflation). So if you have only 30 years of work when you retire, the formula will be plugging in five zeros for five years. That's not ideal, as it will lead to smaller benefit checks. One way to maximize your Social Security benefits is to be sure and have 35 years of earnings.
Remember, too, that the greater those earnings are, the fatter your Social Security checks will be. So it can pay off to boost your earnings as much as possible, perhaps via a temporary part-time job, or by seeking raises more aggressively, or even changing jobs. If you have 35 years but some of them feature paltry earnings, it can be worth working an extra year or two at a good income to replace some weak years. Similarly, if you've worked about 35 years but are now earning much more than you used to (on an inflation-adjusted basis), then it could be worth working an extra few years to replace some low-earning years with higher-earning ones.
Tip No. 2: Start collecting your benefits at the right time
Timing is also a critical issue with Social Security. Many people just assume that they will start collecting at age 65 or so. That's not necessarily the case. The normal (or "full") retirement age for Social Security used to be 65, but it has been increased for many of us. For those born in 1937 or earlier, it's 65, for those born in 1960 or later, it's 67, and for those born between 1937 and 1960, it's somewhere in between.
Despite that, though, you can start receiving benefits as early as age 62 and as late as age 70. Determining when it's best for you to start receiving benefits is a big deal. Start as early as age 62 and your checks will be up to 30% smaller -- but you'll receive more of them than if you started later. Delay, and the checks will get bigger. For every year beyond your full retirement age that you delay, you'll increase their value by about 8% -- until age 70. So delaying from age 67 to 70 can leave you with checks about 24% fatter. (That's enough to turn a $2,000 check into a $2,480 one.)
Delaying can seem like a powerful strategy, but know this: The system is designed so that total benefits received are about the same for those with average life spans -- no matter when they start collecting. So if you need the money, consider starting to collect early and don't feel bad about it, either. If you can afford to wait -- especially if you expect to live a longer-than-average life -- do so.
Tip No. 3: Consider employing a claiming strategy
Much about Social Security is relatively straightforward. But it can get tricky, too, especially when you start learning about claiming strategies. That's because your decision regarding when to start collecting isn't as simple as deciding between small checks at age 62 or much bigger ones at age 70. If you're planning to start collecting benefits before your full retirement age and want to work some then, too, learn how much you can earn before your benefits start getting reduced. (The SSA explains: "If you're younger than full retirement age during all of 2018, we must deduct $1 from your benefits for each $2 you earn above $17,040.") The money withheld isn't lost, though. It's factored into the benefit checks you receive later, which end up increased.
If you're married, there are a bunch of strategies the two of you might employ that can increase your total benefits. For example, you might start collecting the benefits of the spouse with the lower lifetime earnings record on time or early, while delaying starting to collect the benefits of the higher-earning spouse. That way, you both get some income earlier, and when the higher earner hits 70, they can collect extra-large checks. Also, should that higher-earning spouse die first, the spouse with the smaller earnings history can collect those bigger benefit checks -- as widows and widowers can choose to receive 100% of their late spouse's benefit instead of their own.
Meanwhile, a spouse who never worked outside the home or never earned much may be able to bypass his or her own benefits and collect spousal benefits worth 50% of a higher-earning spouse's benefits. (Even divorcees can collect benefits based on an ex's earnings, if they were married at least 10 years and have not remarried.)
The more you learn about Social Security, the more you can maximize your benefits -- potentially bringing in thousands of dollars more per year in retirement.