You’ve diligently saved for retirement and the day has finally come where you no longer have to get up at 6:00 a.m. every day to punch the clock. Congratulations, you no longer have to work to earn a living! But, you will face some important financial decisions that could have a huge impact on the rest of your life. Social Security and Medicare decisions are two of the most important financial decisions that you’ll make in life and it’s important to get them right.
Social Security is a major source of income for most people. In fact, nearly nine out of ten individuals aged 65 and over receive Social Security benefits, and one-in-five elderly married couples and nearly half of elderly unmarried couples rely on Social Security for 90 percent or more of their retirement income, according to the Social Security Administration. It’s a good idea to come up with a plan early on to optimize this income and ensure a smooth retirement.
How Much Will I Receive?
Most people contribute to Social Security throughout their working years. In 2018, the Social Security tax was 6.2 percent for the employee and 6.2 for the employer, or 12.4 percent total. A person earning $100,000 per year has paid about $6,200 into Social Security per year. More than 80 percent of that tax goes to a trust fund that pays benefits to current retirees and the remainder goes into a trust fund for people with disabilities and their families.
The amount that you receive from Social Security is based on your lifetime employment earnings, which means that higher earners are entitled to greater benefits since they paid more into the system. In particular, the Social Security Administration looks at your highest 35 years’ worth of earnings and applies a formula to arrive at your primary insurance amount – or how much you would receive at your full retirement age (which depends on your date of birth).
The full retirement ages based on birth year are:
|1937 or earlier
|65 and 2 months
|65 and 4 months
|65 and 6 months
|65 and 8 months
|65 and 10 months
|1943 – 1954
|66 and 2 months
|66 and 4 months
|66 and 6 months
|66 and 8 months
|66 and 10 months
|1960 and later
The Social Security Administration also provides a helpful Retirement Estimator to see an approximation of your benefits at 62, normal retirement age, and 70. We offer a complimentary Social Security consultation where we’ll talk through your situation and help you think about your claiming strategy.
How to Increase Your Benefits
The only sure-fire way to increase your Social Security benefits – other than earning more money during your working years – is to delay retirement past your full retirement age. By doing so, you can increase your monthly benefit by two-thirds of one percent for each month or eight percent for each year that you delay collecting benefits. You can only do this until the age of 70, at which time no further increase in benefit is possible.
So should everyone wait until they turn 70 to claim? Not necessarily.
While you’ll receive the greatest benefit by waiting until age 70, there are many reasons that you may choose to take benefits earlier. Health issues are among the most common reasons since many people require these benefits to cover medical expenses. If you expect health issues to reduce your life expectancy, you may also want to claim benefits earlier as the math may no longer work out in your favor to delay collecting benefits. You need a plan before you make these decisions. Yes, 70 means the most money every year, but might not make sense in certain situations.
Factor in Your Relationships
Married couples can have very different Social Security benefits depending on their lifetime earnings. If a husband earned an average of $60,000 per year and a wife earned an average of $75,000 per year, the wife would likely have higher Social Security income during retirement. This means that the couple may decide to take the husband’s social security income to fund their retirement and delay the wife’s benefits to maximize them over time.
If you are divorced, but your marriage lasted 10 years or longer, you can also receive benefits on your ex-spouse’s record even if they have remarried. The only requirements are that you are unmarried, aged 62 or older, your ex-spouse is still eligible for Social Security, and the benefit that you’re entitled to receive based on your own work is less than the benefit you would have received based on your ex-spouse’s work.
If your spouse passed away, widows or widowers can start receiving Social Security survivors benefit at age 60 while still allowing your benefits to continue to grow by deferring them. For example, you can collect survivor benefits up until 70 and then switch over to your own benefit at that point to increase your monthly income from Social Security.
Tips for Getting It Right
Social Security is a complex topic that has long-lasting implications. If you take Social Security before your full retirement age, you can reduce your benefit by up to 30 percent for the rest of your life, which can take a huge toll on your quality of life. Those that defer their benefits, optimize their spouse’s benefits, or take other measures can ensure that they’re making the most of Social Security and maximizing their quality of life.
If you would like help navigating Social Security, you may want to consider hiring a financial advisor, like TFS Advisors, with decades of experience helping clients make optimal decisions. The best way to determine when you should file for Social Security is to discuss it with a financial professional. We can help you see the complete financial picture and make the most informed decision.