Social Security: 2 Not-So-Secret Ways Retirees Can Get a Bigger Benefit

Social Security is often the largest source of cash flow in retirement. That means a slightly bigger benefit can have a substantial impact on living standards for retired workers. However, surveys consistently show that very few Americans know how to maximize their payout.

To be clear, there are no secrets or backdoor methods to getting a bigger benefit. But workers and retired workers who understand how Social Security payments are calculated can use that information to their advantage. Read on to learn two not-so-secret ways to score a bigger benefit.

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1. Remain in (or return to) the workforce

For retired workers, Social Security benefits are based on lifetime earnings and claiming age. Income is adjusted or indexed to account for changes in average wages over time. Then indexed earnings from the 35 highest-paid years of work are converted to a monthly average known as the average indexed monthly earnings (AIME) amount.

Next the AIME is run through a formula to determine the primary insurance amount (PIA) for each retired worker when they become eligible at age 62. The PIA is the benefit a worker will receive if the claim Social Security at full retirement age, which is 67 for anyone born in 1960 or later.

However, the Social Security Administration recalculates PIAs annually. That means workers and retirees can increase their retirement benefit by spending more time in the workforce. That information is especially relevant to anyone with fewer than 35 years of employment history, but it also applies to individuals with very low earnings in one or more years.

Here's the bottom line: Workers who remain in (or retirees who return to) the workforce will get a bigger benefit if their income is sufficient to replace a zero- or low-earnings year. In other words, they must earn enough income that it counts among their 35 highest-paid years. Anyone who is uncertain about their past income can find that information by creating a my Social Security account with the Social Security Administration.

2. Delay Social Security benefits until age 70

In the previous section, I discussed how workers and retirees could increase their lifetime incomes to get a bigger Social Security benefit. But there is another way to achieve that goal without staying in (or returning to) the workforce: Claiming Social Security at a later age will also lead to a larger payout.

As mentioned, eligibility for retirement benefits begins at age 62, but workers are not entitled to their PIA until they reach full retirement age. That term is somewhat confusing, though, because it does represent not the largest possible payout, but rather a middle ground.

Specifically, workers who claim Social Security before their full retirement age get less than 100% of their PIA, and workers who claim after full retirement age get more than 100% of their PIA. How much more depends on how many months elapse between full retirement age and claiming age. Benefits increase by two-thirds of one percent per month, or eight percent per year. But delayed retirement credits stop accumulating at age 70, so it never makes sense to claim any later.

The chart below shows the relationship between full retirement age and birth year. It also shows the benefit (as a percentage of PIA) that retired workers would receive at ages 62 and 70. In other words, it shows the smallest possible benefit and the largest possible benefit for each age group.

Data source: The Social Security Administration.

Here's the bottom line: Workers can substantially increase their Social Security benefit by claiming at age 70 as compared to age 62. That information is most relevant to individuals who have not yet filed for Social Security, but it can also apply to current beneficiaries.

For instance, some retired workers can undo their claiming decision, provided their application was approved less than 12 months ago. Other retired workers can suspend their benefit to earn delayed retirement credits, provided they are between full retirement age and 70 years of age.