Once you hit retirement age, Social Security, Uncle Sam’s retirement plan, can make your life a lot better. Here are three things you need to know to get the maximum benefit.
- Work under Social Security at least 35 years. Social Security is calculated based on the sum of your highest earnings over 35 years divided by 420, the number of months in 35 years. If you haven’t worked for 35 years, zeros will be added to the calculation for the years you didn’t work. If you work more than 35 years, the income from your lowest-earning years will be dropped from the formula. You don’t have to be a math genius to know what that does to the average. If you don’t work at least 10 years, under most circumstances, you won’t be eligible for Social Security at all. Social Security doesn’t demand that you be a high earner. In 2012, a worker has to earn a minimum of $4,520 to receive a year’s worth of credits. A self-employed person has to make only $1,600 to earn a year’s worth of Social Security credits. You could make that much picking up beer cans.
- Wait until you’re 70 to collect. The difference between collecting at 62, the earliest year of eligibility, and 70, the latest year for which there is an increase, is about 8% a year. In other words, if you earn $75,000 a year and you retire this year at age 62, your annual Social Security payout would be about $16,300. If you wait until your full retirement age at 66, your Social Security income in 2016 will be around $22,600. If you delay until age 70, you’ll make at least $30,000 a year. All of this is before cost-of-living increases, which in 2012 was 3.6%. Good luck getting that kind of return on your investment anyplace else.
- Strategy. Strategy. Strategy. Social Security is very couple friendly. In 2012, the maximum monthly benefit at age 66 is $2,513 for an individual or $5,026 a month for a couple — $60,312 annually. If both people delay claiming until they are age 70, each would receive at least $3,266 per month with cost-of-living adjustments added later, for a joint annual total of $78,384. Within that framework, there are dozens of ways to design a claiming strategy. The best way to figure out how is to spend $50 on a calculator that will do it for you. One of the best is Social Security Income Planner, a no-nonsense tool that will walk you through all the permutations, including those unique to divorced and widowed people. Over 20 years, by choosing the right strategy, a high-earning couple can make as much as $200,000 more in Social Security than they would have made if both had decided to take Social Security at 62.