Social Security is arguably the most important entitlement program for seniors today (it's right up there next to Medicare). But the plethora of filing options available to eligible beneficiaries makes finding the most rewarding Social Security strategy extremely difficult. Not understanding your options can wind up costing you and your family a substantial amount of money over the long run -- money that could be useful come retirement.
What makes maximizing your lifetime Social Security benefits even tougher is that many workers, and even retirees, don't have a good understanding of what filing options are available. Around half (51%) of all still-working respondents in the latest Gallup survey believed that Social Security benefits won't be there when they retire, which is a long-standing myth that's been repeatedly debunked. Another survey conducted by MassMutual Financial Group showed that only 28% of 1,513 people were able to get a passing grade (i.e., answer seven or more questions correctly out of 10) in its straightforward Social Security quiz.
Maximizing your Social Security benefit could be as easy as one, two, three
Although every person's path to retirement is different, there's often a pretty simple formula that can be followed that will give you a good shot at maximizing your lifetime benefit. Best of all, it doesn't require you to locate a needle in a haystack in order to dramatically boost your benefit.
Maximizing your Social Security benefit could be as easy as one, two, three if you follow the basic outline laid out below.
1. Work as long as you can
You may want to cover your eyes and pretend like you're not reading this point, but working longer really is the biggest secret to a beefier payout.
Working for as long as you can comes with a number of advantages. Perhaps the biggest is that the Social Security Administration calculates your monthly benefit payment by averaging your 35 highest-earning years. If you didn't work 35 years, then the SSA will input $0's for every year below 35, dragging down your benefit payment. Working a minimum of 35 years ensures that no $0's are used when calculating your monthly benefit, thus boosting your chances of a higher lifetime payout.
Also, working longer allows you to generate income into your golden years, which could allow you to delay filing for Social Security benefits (the advantage of which you'll see in point 2).
2. Hold off filing for benefits as long as you can
The second tactic you'll probably want to employ is postponing filing for Social Security benefits for as long as possible. Every individual's path to retirement is different, and a variety of factors ranging from your health to the size of your savings will come into play when you decide when to file for benefits. However, the advantages to claiming as late as possible if you can afford to do so are as clear as day.
Retirees (we're speaking strictly of retired workers and not the disabled or surviving beneficiaries here) are allowed to file for benefits between the ages of 62 and 70. A retiree's full retirement age, or FRA, is the age at which they become eligible for 100% of their benefit payment. For retiring boomers, FRA will range between 66 and 67 years. The earlier boomers file for benefits before turning 66, the lower their monthly benefit will be -- as much as 30% lower if claimed at 62. However, their monthly benefit will grow by roughly 8% per year between their FRA and age 70, so if they wait as long as possible, they'll come out with a monthly payment well ahead of what they'd receive if they applied earlier.
Ultimately, those who claim benefits at 62 and those who wait until 70 will collect roughly the same amount of money by the time they hit 78, the average life expectancy for an American. If you wait till 70 to claim and live past 78, you will almost assuredly collect more in lifetime benefits than if you had started claiming benefits at 62.
3. Consider how your relationship status can boost your and your partner's income
Finally, consider how your relationship status can help your situation. Married couples, couples or parents with children, single individuals and even divorcees can benefit based on their relationship status.
With the recent passage of a two-year budget deal in Congress, two formerly useful strategies for couples -- file-and-suspend, and restricted application -- are mostly going away. Some couples (especially high-income couples) will clearly be sad to see these strategies removed from their options, but it's actually made the process of selecting a strategy a lot easier for most people.
For instance, if you are divorced, but were married to your partner for 10 or more years, and you turn 62 no later than Jan. 1, 2016, you can still file for spousal benefits from your ex-spouse at FRA, but then wait until age 70 to start collecting your own retirement benefit.
Another common strategy for an older parent with younger children is to file for benefits and allow the child to claim a percentage of the older parents' benefit (without reducing the actual payment to the retired parent). Generally, unmarried children younger than 18, or up to age 19 if a full-time high school student, can qualify.
These are just a couple of the strategies that are still open to eligible beneficiaries. If you peruse your options on the SSA's website, or with the help of a financial advisor, you're likely to find additional ways that you can boost your lifetime benefit.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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