As you toil away at your job in your 20s, 30s and 40s, you may not be thinking about the financial safety net you’re quietly building for your retirement years. Thanks to Social Security, nearly all Americans are assured a guaranteed monthly income after they reach retirement age—no matter how long they live.

Knowing when to take Social Security just might be the most important decision you’ll make in retirement. Claim benefits early and you and your spouse will face a steep and permanent cut in monthly income. Waiting until later, however, and you’ll collect a payout that’s as much as 50 percent higher. The more you know about Social Security, the more likely you’ll be able to maximize the benefits you’ve earned over a lifetime of working.

This guide will help you to:
  • Understand how Social Security is computed
  • Calculate your projected benefit
  • Evaluate claiming strategies to maximize your benefit
  • Learn why Social Security is important to older women in particular
  • Know that Social Security is one part of a retirement income stream
Social Security—A Snapshot
  • Number of Americans who receive retirement benefits

    39.5 million
  • Maximum monthly retirement benefit

    $2,787.80
  • Average monthly retirement benefit

    $1,341
Gender gap: $321

(The difference between average monthly benefit of $1,488 for men and $1,167 for women)

How Social Security is Computed

Your Social Security retirement benefit is based on your lifetime earnings. The higher your earnings, up to a maximum taxable amount of $118,500 a year, the higher your benefit.

When you are employed and pay Social Security payroll taxes, you can earn up to a maximum of four work “credits” a year by making at least $5,060. You must earn at least 40 credits over 10 years to qualify for a retirement benefit. Your benefit is based on the 35 years in which you earned the most money. If you haven’t worked for some of those 35 years, zeros for those non-working years are averaged into the calculation, which will lower your payout. Social Security uses a formula, based on your average indexed monthly earnings, to arrive at your basic benefit.

You can increase your benefit by replacing low-earning years or zeros in your record with higher-earning years later in your career, perhaps by working longer than you had anticipated. Also, the age at which you claim benefits can dramatically affect your lifetime payout. For example, you may qualify for benefits at age 62, but the longer you wait to claim your benefit, the higher your monthly payment will be—up to a point. Once you reach 70, the benefit payout no longer rises.

Calculating Your Benefit in Retirement

If you don’t know what your Social Security retirement benefit might be, now’s the time to start looking into it. The Social Security Administration’s online Retirement Estimator can provide estimates based on your actual Social Security earnings record.

You can also sign up for an account where you can chart your income and projected benefits estimates.

Deciding when to claim Social Security is extremely important to your overall financial situation in retirement. You might opt for early retirement benefits at age 62, full retirement benefits at age 66 or 67 (depending on when you were born) or late benefits at age 70. (If you were born in 1960 or later, your full retirement age is 67.)

Let’s say Shelly is in line to receive $21,180 a year if she claims her benefit at her full retirement age of 66. If she claims a benefit at age 62, her benefit drops to $15,885 a year. If she waits to collect until age 70, she’ll get about $28,000 a year.

You’re probably wondering which approach might be best, but that depends almost entirely on your circumstances, including what your income needs might be in the short term and over your lifespan.

Maximizing Your Social Security Benefit

Each year you delay collecting Social Security between ages 62 and 70 increases your payout by about 8 percent.

Here’s a short rundown of the pros and cons of various claiming strategies:

Claiming at age 62

The case for it

Collecting early retirement benefits may make sense if you’re broke or near-broke and in the ranks of the long-term unemployed, or if you have serious health issues that may limit your lifespan. About half of Americans claim benefits as soon as they turn 62.

The case against it

You’ll have to live permanently on a benefit that’s at least 25 percent smaller than if you waited just a few more years to collect. (The reduction goes up to 30 percent in 2022 for people born in 1960 or later). Your annual cost-of-living adjustment (COLA) will be smaller, too. Taking this substantial cut in your fixed income will likely affect your ability to live comfortably in retirement.

Bottom line

If you’re in good health and don’t have enough put away to maintain the standard of living you’re accustomed to, then keep working. As you near retirement, you may well be at the top of your earnings game, allowing you to maximize your Social Security benefit and your savings for retirement. You can even make catch-up contributions to your 401(k) or 403(b) plan or to a traditional or Roth IRA

Claiming at full retirement age

The case for it

You collect 100 percent of your benefit.

The case against it

You could be collecting more. Social Security gives you an incentive to wait even longer for a bigger payout.

Bottom line

If you haven’t saved as much as you should have for retirement and are in relatively good health, it may make sense to wait a little longer up until age 70.

Claiming up until age 70

The case for it

Your monthly benefit will increase by about 8 percent for each year after your full retirement year that you delay claiming up until age 70, which may be even more important if you’re the higher earning half of a couple.

The case against it

You don’t expect to live to a ripe old age, or you’ve saved enough to live comfortably in retirement.

Bottom line

Wait if you can. As investments go, an annual return of 8 percent is a no-brainer.

Strategies for Couples

The 62/70 Split

The case for it

The lower earning spouse, let’s say the wife, files early at age 62 to claim a benefit based on her own record. The higher earning husband delays filing until age 70 to collect the highest benefit possible. If the husband dies after 70, his wife can take her husband’s bigger benefit and drop her own.

The case against it

The lower earner who filed early will collect reduced benefits permanently.

Bottom line

If both people are in good health, delay claiming your benefit until age 70 to collect the highest payout possible.

File and Restrict

The case for it

Applying for Social Security but restricting your claim to your spousal benefit may boost your lifetime payout. This strategy typically works best in cases where the younger spouse is not the higher earner. Also, you’re delaying your own payout so it can grow by 8 percent a year. 

The case against it

Be careful. If you don’t understand the restricted application language and you don’t mark that option clearly on your Social Security claim, you’ll receive payments from your own record and not from your spouse’s.

Bottom line

Congress is phasing out this option, too. Anyone born on or before Jan. 1, 1953, however, is grandfathered in and will still be able to file a restricted application.

Claiming Survivor Benefits Early

The case for it

If your spouse dies and you take the survivors benefit before your full retirement age, you’ll collect benefits for a longer period of time.  

The case against it

If you take the survivors benefit before your full retirement age, the benefit is likely to be reduced by up to 29 percent.

Bottom line

Look before you leap. Each person’s situation is different so the decision to take the benefit early is a personal one.

Your Retirement Income Stream

To maintain your standard of living in retirement, financial experts say you’ll need about 70 percent of your current income. As a result, financial planners have long recommended that Social Security benefits be viewed as just one leg of a “three-legged stool” needed for financial security in retirement. The second leg would be employer-based pensions, 401(k) plans and the like. The third leg would be earnings and asset income.

If you’re like many Americans, a single asset—your home—may represent your most important financial resource for retirement, after Social Security. You can sell your home to create an instant nest egg for retirement, for example, or tap its equity through a line of credit or reverse mortgage. Or, by paying off your mortgage and continuing to live in your home, you can dramatically reduce the amount of income you’ll need to cover expenses during retirement.

The Three-Legged Stool:

Lita Epstein

Social Security is perhaps the strongest leg of the stool, providing 37 percent of all income for Americans age 65 and older. It’s especially important to older Americans with lower incomes. Nearly a fourth of all Social Security beneficiaries have no other source of retirement income.

Private retirement plans provide 18 percent of all income for older Americans. They include pensions and defined contribution plans such as 401(k)s and Individual Retirement Accounts (IRAs).

Earnings and asset income make up the largest—but not necessarily the most stable—leg of the stool, providing 41 percent of all income of Americans age 65 and older. A generation ago, older Americans relied more on asset income than earnings. But people are staying in the workforce longer than they used to, and the tables have turned. Today, 30 percent of all income for older Americans comes from earnings and just 11 percent from assets (income from savings accounts, investments, or reverse mortgages on homes, for example).

Social Security and Women

Social Security is vitally important for all Americans, but it’s especially critical to the financial security of women. Here are just some of the reasons why:

Women account for about 56 percent of all Social Security beneficiaries age 62 and older and nearly two-thirds of beneficiaries age 85 and older. And about half of all unmarried elderly women rely on Social Security benefits for 90 percent or more of their income.

Spousal Benefits

In certain circumstances, a husband or wife can receive up to 50 percent of a spouse’s Social Security benefit. This spousal benefit is available even if one spouse has never worked.

To claim a spousal benefit, the following criteria must be met:

  • You must be at least 62, unless you are caring for a spouse’s child who is under age 16 or disabled, in which case the age limitation doesn’t apply.
  • Your spouse must already have filed for Social Security retirement or disability benefits.

There are, however, some wrinkles to consider before you make a decision on the spousal benefit.

Claiming the spousal benefit before your full retirement age will trigger Social Security’s benefit-reduction—or “deeming”—rules. If you retire at age 62, for example, your benefit could be as little as 32.5 percent of your spouse’s primary insurance amount. If you wait until full retirement age, your benefit could be 50 percent of your spouse’s benefit amount.

Divorce Benefits

If you are divorced, you may be able to claim a spousal benefit based on your ex-spouse’s record. There are, however, these limitations:

  • You must have been married to your ex-spouse for at least 10 years.
  • You must be at least 62 years old.
  • You must be unmarried (even if your ex-spouse remarried).
  • You must not be eligible for an equal or higher benefit on either your own or someone else’s Social Security record.

Working and Collecting Social Security

Here’s some good news: you can get Social Security retirement benefits and work at the same time, increasing your household income. Now the not-so-good news: Social Security will reduce your benefits but only if you are younger than your full retirement age and your earnings exceed certain yearly limits.

In 2016, if you’re younger than your full retirement age for the entire year, Social Security will deduct $1 from your benefit payments for every $2 you earn above $15,720. If you reach your full retirement age during the year, Social Security will deduct $1 for every $3 you earn above $41,880 up to that point.

You can also check out SSA’s Retirement Earnings Test Calculator to find out how much your benefits will be reduced.

Now back to good news: starting with the month you reach your full retirement age, Social Security won’t reduce your benefits no matter how much you earn. But you may have to pay income tax on your benefits—up to 50 percent for individuals earning between $25,000 and $34,000 and couples earning between $32,000 and $44,000, and as much as 85 percent if your earnings are above those amounts.

And there’s one other tax issue. As long as you continue to work, you’ll have to continue to paying Social Security taxes on your earnings. 

Collecting Social Security Overseas

If you’re a U.S. citizen, you can travel to or live in most foreign countries without affecting your Social Security benefit. But if you’re in one of the countries shown below, Social Security may not be able to send your payments there:

  • Azerbaijan
  • Belarus
  • Cuba
  • Georgia
  • Kazakhstan
  • Kyrgyzstan
  • Moldova
  • North Korea
  • Tajikistan
  • Turkmenistan
  • Ukraine
  • Uzbekistan
  • Vietnam

[Note: Social Security may make exceptions, however, for certain eligible beneficiaries in countries other than Cuba and North Korea. Contact your local Social Security office for more information.]

Social Security Disability

Social Security also pays monthly benefits to people whose disability has lasted or is expected to last at least a year. To qualify, you must have a medical condition that meets the SSA’s definition of disability and you must have worked long enough to qualify.

Benefits usually continue until you are able to work again on a regular basis. If you are receiving Social Security disability benefits when you reach full retirement age, your disability benefits automatically convert to retirement benefits and the amount remains the same.

Social Security and Children

Children also become eligible for monthly benefits when one or both of their parents retire, become disabled or die, but they must meet certain criteria. For example, when a parent retires, the child must be unmarried, under age 18 (or 18 or 19 and in grade 12 or lower) or be disabled from a disability that started before age 22. (A child who is disabled will get his or her own Social Security disability payments after age 18).

Any benefits paid to your children will not decrease your retirement benefit. In fact, the value of the children’s benefits, added to your own, may help you decide if taking your retirement benefits sooner may be more advantageous.

Within a family, each qualified child may receive a monthly payment of up to one-half of your full retirement benefit amount, but there is a limit to the total amount paid to family members—generally, 150 to 180 percent of your full retirement benefit.

Signing Up for Social Security

There are three ways to apply for Social Security benefits:

  • Make an appointment at your local Social Security office to visit in person.
  • Apply by telephone by calling 1-800-772-1213.
  • Apply for Social Security online at www.socialsecurity.gov, a process that typically takes 15 to 30 minutes.
Here’s a checklist of the documents you’ll need:
  • Your Social Security number
  • Your birth certificate
  • Your W-2 forms or self-employment tax return for the previous year
  • Your military discharge papers (if applicable)
  • Proof of U.S. citizenship or lawful alien status if you weren’t born in the United States

In most cases, once you submit an application online, you’re done. There are no forms to sign and usually no documentation is required. Social Security will process your application and contact you if any additional information is needed.

Tip: The Social Security Administration also handles enrollments for Medicare, so you should use the same process to sign up for Medicare three months before you turn 65—even if you’re not ready to start receiving Social Security retirement benefits. You can apply for retirement benefits later.

You’ll be automatically enrolled in Medicare Part A (Hospital Insurance, which is free) and Medicare Part B (Medical Insurance, which isn’t free). Medicare Part B premiums are deducted from Social Security benefit payments. Because you must pay a premium for Part B coverage, you can turn it down. If you decide to enroll in Part B later on, however, you may have to pay a late enrollment penalty for as long as you have coverage. (Your monthly premium will go up 10 percent for each 12-month period you were eligible for Part B, but didn’t sign up for it, unless you qualify for a special enrollment period.)`

Expert Q&A

Laurence

Laurence J. Kotlikoff, ​an internationally recognized professor of economics at Boston University, has authored and co-authored 18​ books and hundreds of professional journal articles, including the best-selling Get What’s Yours—The Secrets of Maxing Out Your Social Security.

What are the key elements of a solid financial plan for retirement?

A solid financial plan for retirement requires establishing a living-standard floor and making it as high as possible before taking on investment or other risk.

To establish a living-standard floor, treat all current holdings of risky assets and all planned future contributions to risky assets as money you will never see again.  Based on this, you figure out what you can spend each year such that you can maintain that living standard.

How do you raise this floor safely? 

Start by maxing out your retirement-account contributions (assuming you don’t run into severe cash flow problems), optimizing your Social Security benefits, and timing the start and end date of when you take and stop taking your retirement account assets.

After you have done these and other things, ask how much more money you want to put into risky assets knowing that you won’t spend any of these risk assets until you have converted them into safe assets and also realizing that the more you invest in risky assets, the lower will be your living standard floor.   

Social Security is the biggest source of retirement income for many Americans. How much should it factor into the average person’s major life decisions?

Everyone needs to have a safe financial plan. Social Security is a very big deal for most households and helps build your living-standard floor. Consequently, one needs to assess how work decisions will affect future benefits net of future taxes.  This can easily be done with our company’s software and, I would hope, with other companies’ software. 

What do you think is the single best way to maximize your Social Security benefits?

​Patience. Only 2 percent of Social Security beneficiaries are waiting till age 70 to take their retirement benefit, even though it’s 76 percent higher, after inflation, at age 70 than at age 62 and 32 percent higher, after inflation, at age 70 than at age 66. (These figures are for those whose full retirement age is 66.)

Do most people begin collecting their Social Security retirement benefits too early?

Yes, most people are collecting years too early and missing about on Social Security’s best deal—getting far higher benefits by starting them later.  

You often point out that people can easily lose tens of thousands of dollars making the wrong choices.

Take the case of a very high earning 61-year-old couple that will, according to our software, jointly receive $1,376,190 in lifetime Social Security retirement benefits if they take their benefits at 62. If they wait till they’re 70, this figure (also present-valued as of their current age) rises to $1,765,406. That’s a ton of extra, free, safe money—$389,216, to be exact—just from being patient.  

Resources

Here’s a list of websites and other sources of authoritative information about Social Security benefits.

Websites

Online Calculators (Social Security Administration)

Publications (Social Security Administration)

Books

Get What’s Yours: The Secrets to Maxing Our Your Social Security by Laurence J. Kotlikoff, Philip Moeller, and Paul Solman (Simon & Schuster, 2015)

Social Security for Dummies (2nd Edition) by Jonathan Peterson (Wiley, 2015)

Updated: July 28, 2017