Deciding when to claim Social Security benefits is one of the most important choices you’ll make. If you’re considering starting your checks now because you’re ready to retire or because the coronavirus has interfered with your ability to keep working, you need to make sure you’re really ready. And to do that, you need to answer three key questions first.
1. How does your age when you file affect the amount of your benefits?
Every worker entitled to Social Security has a standard benefit amount, but you’ll receive exactly that amount only if you retire at your designated full retirement age (FRA), which is between 66 and 67 depending on your year of birth. But many workers opt to retire either before or after theirs.
When you start your benefits prior to FRA, you’re subject to an early filing penalty of 5/9 of 1% per month for each of the first 36 months. If you claim earlier than that, each prior month will result in an additional 5/12 of 1% penalty. These small numbers add up, so those retiring at 62 with a full retirement age of 67 would see a 30% cut to their monthly check.
Waiting until after FRA instead earns delayed retirement credits. These increase monthly benefits by 2/3 of 1% for each month you wait, which adds up to an 8% increase for each year of waiting, up to age 70.
Social Security is designed so these penalties or credits equalize the lifetime amount of benefits no matter when someone claims them. But that’s based on an actuarially projected life span; you could either pass away sooner or live longer. You’ll need to consider whether you think you’ll live past the break-even point, or you prefer smaller benefits delivered sooner, when deciding what’s best for you.
2. How are your benefits calculated?
Understanding the Social Security benefits formula is important because it can affect when you decide to leave the workforce. The formula entitles you to a percentage of your average indexed monthly earnings (AIME), which are calculated by first adjusting your wages over your career for inflation, then figuring out your average monthly wage in the 35 years your earnings were the highest.
When your average is determined, 35 years is always the magic number used in the calculation, regardless of the number of years you actually work. If you work too few years and don’t have 420 months of wages to factor in, some months of $0 wages bring that average down. But if you opt to stay on the job longer and are earning more now than in the past (after adjusting for inflation), your higher monthly earnings will be included in your average, replacing months when you earned less and boosting your benefit.
Once you understand this, you can decide if staying on the job longer (if you can) is a smart move to raise your benefits.
3. Are you entitled to spousal or survivors benefits?
If you’re able to claim benefits on your spouse’s work record, this could result in a higher check if your spouse earned more than you did. You can get these benefits if you’re currently married, but also if you are divorced after a marriage of at least 10 years.
Although you can’t double-dip and get both your own benefits and survivors or spousal benefits, you can (and should) work with your spouse to decide on a joint Social Security claiming strategy to maximize them.
And while you can apply for spousal benefits online, you cannot claim your survivors benefits over the internet. As many as two-thirds of workers don’t realize divorced people may be entitled to survivors benefits, and they could be leaving a lot of money on the table.