One of the most important retirement decisions you will make is when to sign up for Social Security. The age you first claim benefits can have a dramatic impact on the size of your monthly payments in retirement. Here are five great ways to make the most of your Social Security benefit:
Work for at least 35 years. Social Security payments are calculated using the 35 years of your career when you earned the most. Those who haven't worked for 35 years have zeros averaged into the calculation, which could significantly lower the monthly benefit. "If you are still working, the way to increase your benefit is to continue working and earning more," says Jim Blankenship, a certified financial planner for Blankenship Financial Planning in New Berlin, Ill., and author of "A Social Security Owner's Manual." "Any time you can eliminate low-earning years or zero years and replace those earlier years with something that is an improvement over them, then you can improve your situation."
Aim to work until your full retirement age. While you can begin receiving benefits as early as age 62, benefit payouts are significantly reduced if you sign up then. Most baby boomers are first eligible for unreduced Social Security benefits beginning at age 66. And for everyone born in 1960 or later, the full retirement age is 67. "Be patient, because there is a big payoff for waiting for your benefits," says Laurence Kotlikoff, a professor of economics at Boston University and a co-developer of the retirement planning software ESPlanner. Age 66 is also the first year you can work and collect benefits at the same time without having your Social Security benefit temporarily withheld if you earn too much.
Consider delaying claiming until age 70. You can further boost your monthly Social Security payments by continuing to delay claiming. After your full retirement age, payments increase by about 8 percent for each additional year of delay up until age 70. "The rule of thumb is if you are single, and you believe you are going to live past the age of 80, typically it is best for people to delay as late as possible to the age of 70," says William Meyer, founder and managing principal of Social Security Solutions, a company that analyzes Social Security claiming strategies. "If you live past 80, by delaying you are going to get more. The best investment deal out there right now is to get 8 percent guaranteed." After age 70, there is no additional benefit to delaying signing up for benefits.
Coordinate Social Security decisions with your spouse. Married individuals can claim Social Security payments worth as much as 50 percent of the higher earner's benefit if that amount is higher than what they can get based on their own work record. Divorced individuals can also claim spousal payments if the marriage lasted at least 10 years. If you wait until age 66 to sign up, you can even claim spousal benefits and then later switch to benefits based on your own work history, which will then be larger due to delayed claiming.
Married individuals are also eligible for survivor payments when their spouse passes away. Husbands and wives can increase the amount their surviving spouse will receive by delaying claiming their Social Security benefit. Conversely, spouses who receive reduced Social Security benefits because they claimed benefits before their full retirement age will also reduce the amount the surviving member of the couple gets as a survivor's payment. "Get the survivor benefits as high as possible so that the surviving spouse will get even more out of the system," Meyer says. "If the husband has a higher earnings history and can get his benefit as high as possible, if his wife lives past him, she will inherit his higher benefit amount."
Watch out for the earnings limit. If you sign up for Social Security before age 66 and also earn more than $15,480 in 2014, $1 will be withheld from your Social Security payments for every $2 you earn above the limit. The year you turn 66, the earning limit increases to $41,400, and $1 is withheld for every $3 in pay you receive above the limit. However, at age 66, your monthly payments will be adjusted to reflect the withheld earnings and your new work record. And after age 66, there is no penalty for working and receiving benefits at the same time. "On the upside, for each month's worth of benefit that you are losing during that period, you are gaining back a month's worth of delayed filing," Blankenship says. "If you started at age 62 and you earned enough each year over four years to have to give back two months' worth of benefits, then when you hit age 66, your benefit is recalculated as if you started later, so it's a slightly higher benefit."
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