Given that millions of Americans rely on Social Security for a substantial portion of their retirement income, it's crucial that we obtain the maximum benefit possible. Fortunately, Social Security isn't a simple, rigid formula; there are several ways to squeeze a little extra out of your benefits. Here are three suggestions from our experts on how to do just that.
Many divorced spouses don't realize they might be eligible to get much larger Social Security benefits by claiming against their ex-spouse's work history, rather than their own earnings record. The rules for claiming spousal benefits after divorce are quite generous, and in some cases they can be greater than what a current spouse can receive.
In order to be eligible for spousal benefits from an ex-spouse, you must have been married to that person for at least 10 years before your divorce. In addition, you must have reached the minimum eligibility age of 62. It doesn't matter whether your ex-spouse has claimed benefits; unlike with current spouses, your ex-spouse doesn't need to file a claim for you to be eligible for spousal benefits.
Most importantly, if you have remarried, you're not eligible to claim spousal benefits on your ex-spouse's work record; any spousal benefits would be based on your current spouse's earnings history. However, if that later marriage ends due to either death or divorce, then your ex-spouse benefits can re-emerge. That can make all the permutations tricky to figure out, but it's still worth seeing whether you can squeeze a bit more money out of your Social Security benefits.
Here's an underappreciated way to boost your Social Security income: earn more during your working life.
Social Security retirement benefits are based on your working history. In order to qualify, you need 40 "credits," and you can earn up to four credits per year. For 2015, you earn one credit for every $1,220 you earn, so you only need $4,880 in earnings to rack up four credits. Most people can earn the necessary 40 credits in just 10 years.
Your benefit is calculated based on the 35 years in your working history with the highest "indexed" earnings. The Social Security system indexes each year's earnings, adjusting them to closely match recent wage levels. Thus if you earned $20,000 per year decades ago, when that was worth $40,000 in today's wages, the Social Security Association would list that year's wages as $40,000 in its benefit calculation. Without indexing, your early earnings would be relatively small, dragging down your average even if they were great wages at the time.
To ensure you earn the most money possible from Social Security, you might consider working a few years longer than planned. Given that most of us reach our peak earnings right before retirement, extending your career could boost your average earnings. At the very least, you may want to work at least 35 years total; otherwise, you will have years of zero earnings on your record, which can substantially reduce your average and, thereby, your eventual Social Security benefit.
One smart way to maximize your benefits is to wait until your full retirement age or later to claim Social Security. Your full retirement age depends on what year you were born and ranges from 66 to 67. If you start claiming Social Security benefits at your full retirement age, you will receive 100% of your primary insurance amount each month.
You can claim Social Security benefits as early as 62. However, your monthly benefits are reduced by about 6% for each year before your full retirement age. Granted, in terms of total benefits received, those who claim at 62 will stay ahead of those who claim at 66 for quite some time -- until age 78, to be precise. This is why some say it's smart to claim early. You can see the breakeven calculation visually below:
However, while the average life expectancy for all Americans is 78, if you reach age 62, you're expected to live another 20 to 22 years, depending on whether you're male or female. Therefore most near-retirees would earn more in lifetime benefits if they waited until their full retirement age to claim Social Security.
Furthermore, for every year you defer claiming past your full retirement age, up to age 70, your Social Security benefits increase by 8%. That's a big bonus for waiting an additional year. While only 7% of people wait past age 66 to claim, it's worth serious consideration.
To take the extreme example, if you wait to claim until age 70, you have to earn Social Security benefits until you are 83 before you come out ahead. While that may seem like a long shot, of those who make it to age 62, 51% of males and 63% of females are expected to live to see age 83.
Everyone's situation is different, so you should carefully think about when you claim your Social Security benefits.