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Understanding how your Social Security benefits are calculated is an essential part of knowing how and when to claim a maximum payment. The cost of getting it wrong could mean thousands of fewer profits every year.
Work at least 35 years. Many people realize that their Social Security benefits are based on their employment history, but few understand the nuances that can affect payments.
When you work and pay Social Security taxes, you earn credits. People born in 1929 or later need at least 40 credits — usually 10 years of work — to qualify for benefits, unless they are disabled or surviving a deceased worker.
The federal government bases your benefits on the 35 years of work during which you had the highest earnings. For each year of less than 35 years of work, he credits you with zero income, which will lower your monthly payment.
“If you want to maximize your payments, do what you can to reach that 35,” says Stephen Tally, COO at Leo Wealth in Iselin, NJ.
It’s also best, if possible, to work long enough that later years in which you earned more are the only ones among the 35 counted towards your social security benefits, he says.
For example, if you earned a low salary for several years in your 20s and worked 33 years later in your life in a much higher paying job, two years of those low income years will count towards your benefits. .
But if you were to work two years later in life at a higher salary, it could dramatically increase your Social Security payment. (Find more information on the formula for calculating your benefits on the administration website as well as calculators to estimate your benefits at different ages.
Delay the filing of benefits until age 70: Anyone who is entitled to Social Security benefits can start claiming them at 62, but if they wait until full retirement age, they will receive a larger payment. And those who wait until they reach full retirement age will see an even bigger increase in their benefits.
For those who claim social security at 62, their benefits are reduced by a small percentage for each month before full retirement age. The age of your full retirement depends on your date of birth. (Check your full retirement age on the Social Security Administration website.
If a beneficiary with a full retirement age of 67, for example, claims benefits at age 62, their monthly payment of $ 1,000 would be reduced by 30% to $ 700. (Check by how much your benefits will be reduced if you apply early.)
Tally says her company discourages early claims because the reduced benefit is “so punitive.”
In contrast, those who defer claiming benefits beyond full retirement age receive a “deferred retirement credit” —an annual increase of 5.5% to 8% in their benefits, depending on their date. from birth — until they reach the age of 70. For example, if you were born after or after January 1, 1943, you will earn 8% more for each year that you defer payment of benefits until age 70.
The difference can be significant. If you were born in 1957 and apply for benefits at your full retirement age of 66½, you will receive 100% of your monthly benefit. If you delay until the age of 70, you will receive 128% of your monthly benefit. (See how delaying Social Security payments affects your monthly benefits.)
“If you live to be 90 or 92, that’s not a small number,” Tally says.
You don’t have to keep working to get that deferred annual retirement credit, notes Audrey Blanke, financial planner at Baird in Milwaukee. “You can stop working at 62 and not collect benefits until age 70, which allows your benefits to continue to increase,” and that credit will still be applied, she says.
However, it’s important to remember that your monthly Social Security benefits don’t increase after age 70, so there’s no incentive to wait any longer.
When to start collecting benefits is a personal decision that can vary depending on factors such as life expectancy, cash needs, and whether you are married or not, says Blanke.
Your risk profile, other income, and other assets, such as real estate, are also some of the factors to consider, says Chad Parks, founder and CEO of fintech company Ubiquity Retirement + Savings in San Francisco.
Those with enough prudently invested retirement savings may want to use that money first and wait until they are 70 to claim Social Security, he says. But those who are comfortable investing their savings more aggressively might want to take their Social Security benefits at age 62, which means a reduced monthly payment, but gives their assets more time to grow, says. he.
Use your spousal benefits. Many people do not realize that even if they have never worked or have not accumulated enough credits, they can receive up to half of the social security benefits their spouse is entitled to at age. retirement at full rate.
This can apply even to those who are divorced after a marriage of at least 10 years. Widows and widowers can receive up to 100% of the benefit to which their deceased spouse was entitled.
In most cases, spousal benefits can only be collected after your working spouse has claimed their benefits. The exceptions to this rule are limited and only apply to those who filed for benefits before April 30, 2016 and to divorced spouses. The amount you are entitled to will depend on your spouse’s age and work history, your age and work history, and the date of your application.
If you were born on or after January 2, 1954 and are entitled to your own benefits, when you apply for Social Security you will receive the greater of your personal or spousal benefits. However, if you were born before that and have reached full retirement age, you can choose to receive your spousal benefits and defer payment of your own benefits to a later date.
Spousal benefits can be collected as early as age 62, but will likely be reduced if you apply before your full retirement age, unless you are caring for a child who is entitled to benefits. in the file of your spouse who is under 16 or has a disability.
But unlike personal Social Security benefits, spousal benefits do not exceed your full retirement age, so there is no point in delaying beyond that age. (The Social Security Administration offers a calculator to help you determine your spousal benefit.)
If both spouses are entitled to their own social security and wish to claim it before full retirement age, they may be better off if the lower-income spouse files first and the higher-income spouse. high postpones its request. Growth in deferred retirement credit will be much greater for high earners, Blanke notes.
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