Wondering how to maximize your Social Security benefits? Here are three options almost anyone can do.
Not so long ago, baby boomers viewed Social Security as a retirement program for old folks. High-earning boomers felt that Social Security didn’t apply to them because the monthly checks were small and they believed the system wouldn’t be around when they retired.
Now the tide has shifted. Nearly all boomers have embraced Social Security, and they’re on a mission to get the most out of the system. Maximizing Social Security has become a national obsession, even—especially—among high-earners.
A boomer who has earned the Social Security maximum throughout his career and who turns full retirement age (66) in 2016 will receive a monthly benefit of approximately $2,700. If he plays his cards right, he could receive even more. One of the most frequently asked questions by boomers is: “How can I increase my Social Security benefit?” There are three ways to do it.
The easiest way to increase your Social Security benefit is to do nothing. In 1975 Congress authorized the automatic cost-of-living adjustment (COLA) based on the annual increase in the CPI-W from the third quarter of one year to the third quarter of the following year. The annual COLA is applied beginning with December benefits, which are payable in January. Most of the news reports that come out each year when the COLA is announced talk about the high cost of living and whether the COLA increase is enough for seniors on fixed incomes. What is not so well publicized is how the COLA can impact a person’s Social Security benefit over time. The higher the benefit, the higher the COLA increase will be.
Let’s take someone with a roughly average benefit of $1,300. If we apply a 2.7% COLA to this benefit (2.7% is the number used in the Social Security Trustees’ intermediate projections) then the benefit goes up to $1,335, a $35 dollar increase. A maximum earner with a PIA of $2,700 would get a benefit increase of $73 ($2,700 x 0.027 = $73). If that same maximum earner were to delay his benefit to age 70, he’d get an increase of $96 ($2,700 x 1.32 x 0.027 = $96). These may not seem like large amounts, but if you multiply them out and compound them over many years, they add up.
This brings us to the second way you can increase your Social Security benefit.
Many about-to-retire boomers ask how their benefit will be affected if they continue to work or, conversely, if they retire early.
Social Security’s primary insurance amount (PIA) is based on an average of the highest 35 years of earnings. If you don’t have 35 years of earnings, your total earnings will still be divided by 35 years to come up with the average. Working longer will allow you to replace those years of zero earnings with positive earnings and bring up the average. If you already have 35 years of earnings, you can still improve your earnings record if you earn enough to cause an earlier, lower year of earnings to drop off. How will these higher earnings affect your Social Security benefit? Let’s use the example of a person born in 1954 who started working in 1976 and earned the Social Security maximum all his life. When he turns 62 in 2016, his PIA is calculated to be approximately $2,700. This is based on earnings from 1981 through 2015.
What if he decides to work an extra year and earns the Social Security maximum of $118,500 in 2016? Now the 1981 indexed earnings of $100,232 will drop off and be replaced by the 2016 earnings of $118,500. His earnings record will now include the years 1982 through 2016 and raise his average indexed monthly earnings, raising his PIA by about $10 dollars.
What if he works another year at maximum earnings? His PIA will go up another few dollars. Incidentally, if his earnings in 2016 had been less than they had been in 1981, it would not cause his PIA to go down. Once the PIA has been calculated at age 62, higher earnings may cause it to go up, but low earnings will not cause it to go down.
So you can feel free to shift to part-time work without jeopardizing your Social Security benefit, understanding that if you are under full retirement age (FRA), $1 in benefits will be withheld for every
$2 you earn over $15,720 in 2016. Again, we’re talking small amounts, but they grow larger when you multiply them out and apply COLAs and delayed retirement credits. This brings us to the third way to increase a Social Security benefit.
Delay the Start of Benefits
Most boomers are aware of the rules that provide for a reduced benefit if they apply at 62 and a higher benefit if they file at 70. Indeed, the amounts are shown right on the annual Social Security statement. But the difference between the age-62 amount and the age-70 amount doesn’t seem very large at first glance, especially when the carrot of immediate free money is dangling in your face.
But if you project those benefits out over a lifetime, incorporating annual COLAs, and even additional earnings—understanding that if the primary breadwinner in your family dies, his higher benefit will continue as long as the surviving spouse is alive—the difference between applying at 62 and applying at 70 expands enormously.
Let’s take the case of the maximum earner who turns 62 in 2016. The PIA formula shows his PIA to be about $2,700. If he were to take his benefit this year, he would receive 75% of $2,700, or $2,025 per month. If he waits until 66, he’ll receive the full $2,700. And if he delays to age 70, the benefit will increase by 8% annual delayed credits between 66 and 70, giving him a benefit of 132% of $2,700, or $3,564.
Adding up all the monthly benefits, by age 90, he will have received a total of $704,700 if he files at 62, or $898,128 if he files at 70. If he doesn’t make it to 90, his surviving spouse will continue to receive his benefit as her survivor benefit. These amounts do not include COLAs or additional earnings.
Now let’s add COLAs. The Social Security Trustees project annual COLAs of about 2% over the next five years, and 2.7% beyond that. In our example, using an average COLA of 2% means that total benefits at 90 would be $942,402 if our boomer claims at 62, or $1,291,989 if he claims at 70. The monthly benefit at age 90 would be $3,526 if he had claimed at 62, vs. $6,205 if he had claimed at 70. (Because he may be long gone by then, the likelihood is that it will be his widow who’ll be receiving the age-90 benefit. That means wives should make the decision about when the husband claims his benefit. Women tend to focus more on monthly income than cumulative benefits. Show any woman what her age-90 benefit will be under the two claiming scenarios and the choice will be clear.)
Now let’s include additional earnings. For this calculation, we’ll want to be a little more precise, and use an estimate of $2,788, which assumes our boomer earned the Social Security maximum his whole career and stopped working at age 62. What if he keeps working at maximum salary until age 66? Now his PIA goes up to $2,817. If he keeps working until age 70, it rises to $2,870. (These estimates assume the Social Security wage base rises by 4% per year.)
And that’s without COLAs and delayed retirement credits. When we factor in estimated 2% cost-of- living adjustments and 8% annual DRCs from ages 66 through 70, we get an age-70 benefit of $4,439. This will boost his cumulative benefits by age 90 to $1,373,336 and his widow’s monthly income to $6,596—compared with $1,334,098 and $6,407, respectively, if he had claimed at 70 but stopped working at 62.
So, if you are a 62-year-old maximum earner and you want to get the absolute maximum Social Security benefit, you might: (1) keep working at maximum salary to age 70, and (2) claim your Social Security benefit at age 70. This will give you a benefit of $4,439 per month at age 70, compared with a benefit of $2,450 at age 70 if you retired and claimed benefits at 62 (this is the $2,091 early filing benefit plus eight years of 2% COLAs). By age 90, this maximization strategy will give you cumulative benefits of $1,373,336 vs. $973,375 if you claim at 62, and monthly income of $6,596 vs.$3,640.
Real Life Applications
Obviously, these show the extremes, from stopping work and claiming benefits at 62 to stopping work and claiming benefits at 70. In real life, the stop- work age and the claim-benefits age could be different. You might stop working at 62 and file for benefits at 70. This would give you more benefits than if you had filed at 62, but less than if you had kept working until age 70.
Social Security strategies must naturally be integrated into your overall retirement plan. But if you’re looking to get the most out of the system, remember this: Work till 70, claim at 70.
Furthermore, these amounts also do not include taxes. Most retirees will pay income taxes on 85% of their benefits. But we’re talking here about how to get the most dollars out of the system. Since the government never takes 100% of our money, boomers who maximize Social Security benefits will end up ahead, even after paying the necessary taxes.
What if You Have Already Filed?
How can you increase your benefit if you have already filed for Social Security? The answer is simple: Keep working. If it’s been less than 12 months since you filed, you can withdraw your application and repay benefits and start over later.
If it has been more than 12 months since you’ve filed, or if you don’t want to go to the trouble of withdrawing and repaying, you can simply go to work at a high enough salary that all of your benefits will be withheld (roughly $60,000 or more). When you turn full retirement age, the benefit will be recomputed to add back in the actuarial reduction for those months in which a benefit was withheld. At this time you can voluntarily suspend your benefit to earn the 8% annual delayed credits on the amount of the benefit at the time of suspension.
There have been cases where a client filed for Social Security at 62, received just one or two checks, and then went back to work. Because the benefit will be suspended—automatically from 62 to 66 and voluntarily from 66 to 70—they will end up with nearly the same benefit as if they had initially waited until age 70 to file.
There may be more ways to increase your Social Security income if you also qualify for spousal benefits, divorced-spouse benefits, or survivor benefits. For customized help, visit a financial advisor who has the calculation tools necessary to analyze Social Security claiming strategies that consider your individual situation.
By Elaine Floyd
As director of retirement and life planning for Horsesmouth, Elaine Floyd helps advisors better serve their clients by understanding the practical and technical aspects of retirement income planning. A former wirehouse broker, she earned her CFP designation in 1986.
*Carol Gosho, Principal, Gosho Financial Group with Securities offered through TD Ameritrade Institutional, Member FINRA/SIPC.
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