Photo: 401kcalculator.org via Flickr
There are several strategies married couples can use to maximize their Social Security benefits, such as the popular "file-and-suspend" strategy. However, if you're single, there are a few ways you can maximize your own benefits -- if you know how the program works. Here are three suggestions from our Social Security experts that can help you do just that.
Matt Frankel: One potential way to max out your Social Security benefits is to understand how the benefit formula works and use it to your advantage.
Unlike many pension plans that are based on just the top few years of an employee's earnings, Social Security takes your 35 highest-earning years into account. Each year's earnings are indexed for inflation, and the monthly average of your best 35 years is used to determine your Social Security benefit.
The reason that it pays to know this is that many people have a few sub-par years dragging their benefit down. Maybe you stayed home with your children when you were younger and didn't start working full time until your 30's. Or, if your salary now is dramatically higher than it was at the start of your career, it could pull your average down. As a personal example, I currently have 20 years of work on my Social Security statement, but the first two are the $440 and $725 I earned while working a part-time job during high school.
Here's why this can become a problem. Let's say that you're at full retirement age (currently 66), and that you've worked for a total of 32 years with an average adjusted salary of $50,000. Well, in the eyes of Social Security, the three "missing" working years in the calculation drag your average down to less than $46,000.
The point is that since most people earn their highest salary toward the end of their career, choosing to stay at your job for another year or two -- even if you're at retirement age -- can boost your 35-year average and therefore your Social Security benefit after you retire. And, that's in addition to the extra money you'd be entitled to for waiting.
Sean Williams: Although single beneficiaries may not have the luxury of relying on spousal income, they can still maximize their lifetime benefits by waiting as long as possible (preferably age 70) to file for benefits. Social Security benefit payments accrue at a rate of roughly 8% per year, thus the difference between claiming as soon as you turn age 62 and waiting as long as possible (age 70) can be more than 70%!
What you should do in order claim benefits as late as possible is ensure you have a plan in place to cover your monthly expenses (rent, food, and so on). This could mean working into your golden years, as my Foolish colleague Matt Frankel has suggested. But, a better solution would be to have alternative retirement tools at your disposal to help pay for your day-to-day expenses. A Roth IRA, which allows your money to grow completely tax-free for life, or an employer-sponsored 401(k) which allows your nest egg to grow on a tax-deferred basis, are two examples of investment vehicles that can help cover your expenses while your Social Security payment grows.
Another oft-forgotten rule is that you always have Form 521 in your back pocket should you need it. Form 521, or as most people know it better, the "do-over clause," allows you, within the first 12 months after filing for benefits, to "un-file" your claim. In order to do so you'd need to pay back all Social Security benefits received within the past 12 months. But, in doing so you'll allow your benefit to keep accruing at roughly 8% per year. The do-over clause is great for single people who regret filing for benefits too early, or who land a job shortly after filing for benefits and can cover their basic expenses with income from their job.
Dan Caplinger: One thing that many people who were previously married don't realize is that Social Security has extensive benefits for divorced spouses and for widows and widowers. If you were married for 10 years and then divorced, then you can usually claim spousal or survivor benefits based on your former spouse's work history as long as you're still single. Similarly, if you were married and your spouse died, then widow and widower benefits can kick in as early as age 60.
In order to maximize your total Social Security payments over your lifetime, you need to keep these other benefits in mind. For instance, surviving spouses can claim a regular retirement benefit based on their own work history and then later switch to a survivor benefit, or vice versa. This allows the unclaimed benefit to grow while letting you get at least some benefits now. Most experts believe that these choices are still available for widows and widowers even after recent law changes that will eliminate similar strategies for married couples in which both spouses are still living. By being smart about using these strategies, you can dramatically increase the amount of money you get from Social Security during your retirement years.
