Social Security is extremely important to the financial security of millions of Americans in retirement. However, far too many people don't understand Social Security, especially those who haven't yet reached retirement age.
With that in mind, here are five Social Security tips that can help all Americans know what to expect from their Social Security benefits, how to maximize their own Social Security income, and what the program may look like by the time they reach full retirement age.
Check your statement – every year
Do you know how much you can expect from Social Security? While there's no way to accurately predict your Social Security benefits if you're still working since all of your future earnings will be used to determine your benefit, your annual Social Security statement is the next best thing.
In addition to providing a projection of your future Social Security benefits based on your earnings record, your annual Social Security statement can tell you:
- How much you could get in disability benefits if you were to become disabled.
- How much your survivors could get if you were to die prematurely.
- Whether you've worked enough to qualify for Medicare at 65.
Furthermore, it's important to verify the accuracy of your earnings record. Since your Social Security benefits are based on your highest 35 years of earnings, any missing earnings could have a significant impact on your benefits.
Know the effects of early or late Social Security
Depending on when you were born, your Social Security full retirement age can be anywhere between 66 and 67 years of age. However, you don't necessarily need to wait until full retirement age to claim your benefits -- you can start receiving them as early as age 62 or as late as age 70. In fact, the majority of Americans choose to claim Social Security before reaching full retirement age.
Therefore, one important thing to know is how your age affects your Social Security benefits. If you claim before full retirement age, your benefits will be permanently reduced. Conversely, if you wait until after your full retirement age, your benefits will be permanently increased.
If you're curious about how a specific claiming age could affect your benefits, first learn your full retirement age, and then apply the appropriate rule(s):
- If you claim Social Security early, your benefit will be reduced at the rate of 6 2/3% per year (about 0.56% per month), for as long as 36 months before your full retirement age.
- Beyond 36 months early, your benefit will be further reduced at the rate of 5% per year (about 0.42% per month), until as early as age 62.
- If you claim Social Security late, your benefit will be increased at a rate of 8% per year (about 0.67% per month), until as late as age 70.
Know how to find your ideal claiming age
The most popular age to claim Social Security is age 62, but that doesn't mean that claiming early is right for everyone. There are several factors that can help you determine the ideal Social Security claiming age for you.
Just to name a few examples, you might want to claim Social Security early if:
- You lose your job, or your health prevents you from working.
- You're in poor health, or don't expect to live to the average American's life expectancy.
- You retire early.
- Your spouse is going to collect a spousal benefit on your work record and has reached his or her full retirement age.
Conversely, you may want to delay Social Security if:
- You plan to keep working beyond your full retirement age.
- You want the maximum possible monthly benefit.
- You're in great health and/or have a family history of longevity.
Consider your spouse's situation, too
The fourth bullet point under the reasons to claim early may seem confusing, so let me explain a bit further.
Social Security has a program known as "spousal benefits" that provides much-needed retirement income to spouses who didn't work or earned relatively little throughout their lifetimes. For example, stay-at-home parents often qualify for spousal benefits when they reach Social Security age.
While there's much more to spousal benefits than I can explain in a few paragraphs, the general idea is that at full retirement age, spouses who qualify will receive a total retirement benefit equal to one-half of the higher earning spouse's full retirement benefit. In other words, if you are entitled to $1,600 per month and your spouse never worked, he or she could get a spousal benefit of $800 based on your work record.
One key point to remember is that there's no such thing as delayed retirement credit for spousal benefits -- that is, there's no reason to delay a spousal benefit beyond full retirement age. And the primary earner must be collecting their own retirement benefit before a spousal benefit can be paid.
The point is that even if you can get a higher Social Security benefit by waiting, it rarely pays to delay a spousal benefit beyond your spouse's full retirement age.
The truth about Social Security's financial future
Like most items on this list, there's far more to Social Security's finances than I can explain in 200 words or so. That's why the Social Security trustees report is more than 200 pages long. I've written more thorough articles on Social Security's financial condition if you're interested in the details.
For now, however, I'd like to debunk two common myths -- that the U.S. government raided Social Security's reserves and that Social Security is broke.
First, the U.S. government didn't steal Social Security's reserves. In fact, Social Security has nearly $3 trillion in its trust funds. This money isn't sitting in cash somewhere -- to generate some returns, Social Security's reserves are invested in Treasury securities. So to an extent it's true that the government "borrowed" from Social Security, but it's no different from when the government "borrows" from you if you buy a savings bond.
Second, since Social Security has nearly $3 trillion in reserves, it is certainly not broke. Not yet, anyway. However, the growing number of baby boomer retirees combined with longer life expectancies is likely to drain Social Security's reserves over the next 16 years or so. By 2034, the reserves are expected to be completely gone.
Here's what Americans need to know about this. Even if it happens, incoming payroll taxes would cover roughly three-fourths of benefits, so as a worst-case scenario, we're talking about a 25% cut. Furthermore, history tells us that something will be done. This certainly isn't the first time Social Security has been in trouble, and we fixed it before. So even if you're decades away from retirement, there's no reason to believe Social Security won't be there when you get older.