This article was updated on April 10, 2017, and originally published on May 2, 2016.
We've written several times about how Congress closed some Social Security loopholes this year -- particularly the "file and suspend" strategy, which put thousands of extra dollars in many couples' pockets. Yet there are still some strategies that could help you get more cash out of Social Security. Here are five things you need to know in order to make the most of your benefits.
1. Don't be in a rush to claim your benefits
This is the most obvious suggestion on the list, but it's certainly worth mentioning since the most popular age for starting Social Security benefits is 62 -- the earliest allowable age.
Here are the numbers behind early or late retirement:
- If you claim benefits before your full retirement age (66-67, depending on the year you were born), your benefit will be permanently reduced by 6.67% for each year you claim early, up to 36 months. On a monthly basis, this translates to 5/9 of 1% per month.
- Beyond 36 months early, your benefits are reduced by 5% per year, or 5/12 of 1% per month.
- If you choose to wait until after your full retirement age, your benefits will be permanently increased by 8% for each year you choose to wait (2/3 of 1% per month), until as late as age 70.
For example, if your benefit at full retirement age of 66 is calculated to be $1,500, filing at 62 will reduce your monthly benefit to $1,125. On the other hand, waiting until 70 would increase your benefit to $1,980 per month. That's a big difference.
In fairness, your lifetime total Social Security benefits should be the same, regardless at what age you decide to file. However, if you're in particularly good health, wouldn't mind working for a few more years, or if you have a family history of longevity, waiting could work out in your favor.
2. You can collect even if you're working
Don't let the fact that you're working keep you from claiming Social Security benefits. Depending on your age, a certain amount of your earnings are ignored for Social Security purposes.
- If you will reach full retirement age after 2017, your first $16,920 of earnings are ignored. Beyond that amount, every $2 in earnings will reduce your benefits by $1.
- If you will reach full retirement age during 2016, your first $44,880 of earnings are ignored, and only those earnings from the months prior to your birthday will count. Earnings above this threshold will result in a $1 reduction for every $3 in excess earnings.
- If you are beyond full retirement age, you can earn an unlimited amount of income, and your benefits will be unaffected.
It's important to point out that any reduction is actually a withholding, to be paid at a later date. In other words, if your earnings cause your benefit checks to be reduced, it will permanently increase your benefits later on.
3. You should understand how the formula works
Unlike many pension plans, Social Security isn't just based on your last few years of earnings at retirement. Rather, your Social Security benefit is determined by a formula that averages your best 35 years of inflation-indexed earnings.
Here's how knowing this can be helpful. Let's say that you're 62 and are considering filing for Social Security. And, we'll say that of your highest 35 years of earnings, a couple of them were extremely low -- maybe from a part-time job when you were younger, or maybe you spent a couple of years unemployed or underemployed.
As a personal example, I have 18 years of earnings on my Social Security statement, but two of those were from part-time work in high school and were less than $5,000. So, I plan to work for at least 37 years altogether in order for these two years to be ignored.
In a situation like this, if you choose to work for another year or two, you can replace these lower years in the Social Security benefit calculation with a year or two of your current salary. In other words, not only would you increase your benefit by waiting for a few years, as I described in the first section, but you'll also increase your lifetime average -- effectively getting a double-benefit from working longer.
4. If you're divorced, you might be entitled to benefits
Divorced spouses may be able to claim benefits on their ex-spouse's work record, even if the spouse has since remarried.
The benefit amount is one-half of the ex-spouse's full retirement benefit if claimed at your full retirement age, and will be reduced if you claim it early, similarly to spousal benefits for married couples. In order to claim benefits as a divorced spouse, the following conditions must be met:
- Your marriage lasted 10 years or longer
- You are currently unmarried
- You are age 62 or older
- Your ex-spouse is entitled to Social Security benefits
- Your own benefit is less than that you would receive based on your ex-spouse's work
You generally cannot claim a divorced spouse benefit if you remarry, unless your later marriage ends by death, divorce, or annulment. Your ex-spouse doesn't necessarily need to have applied for their own benefits -- if you've been divorced for two years or more and your ex-spouse qualifies for benefits, you can claim a benefit on his or her work record.
5. There are still some strategies for spouses
As I mentioned, Congress recently eliminated the file-and-suspend strategy, where one spouse would file for benefits and immediately suspend them, allowing their own benefit to grow while the other spouse claimed a spousal benefit on their work record.
But there is one strategy you might want to consider if you're in a two-worker household. Basically, the lower earner files for benefits at their full retirement age (or before), while the higher-earning spouse waits until age 70, since they have more to gain from delayed-retirement credits.
Consider an example of two spouses. One is entitled to a monthly benefit of $1,500 at full retirement age, while the other is entitled to $1,000. They would get a combined benefit of $2,500 if they both filed at full retirement age. (Note: For simplicity, we'll assume they reach retirement age at the same time.)
If the lower-earning spouse chose to delay their benefits until age 70, they would get $1,320 per month. So, for four years, the couple would receive the higher earner's $1,500 check, and afterward they would receive $2,820 per month, with adjustments for cost of living. On the other hand, if the higher-earning spouse chose to wait, their benefit would swell to $1,980. So the couple would receive $1,000 per month for four years and $2,980 thereafter. While this strategy requires one spouse to delay retirement, it's a good way to maximize benefits without waiting until 70 to receive some income.
The bottom line on Social Security benefits
There's a recurring theme to take note of here: The best way to maximize your own Social Security benefits is to know as much as you can about how the program works. The information I've listed here is a good start, but it pays to explore the Social Security Administration's website and stay up to date on any changes to the rules between now and when you reach retirement age.