Understanding how your Social Security benefits are calculated is a critical component of knowing how and when to claim for maximum payout. The cost of getting it wrong could mean thousands less in benefits annually.
Here are some tips from financial professionals for maximizing benefits:
Work at least 35 years. Many people realize that their Social Security benefits are based on their work history, but few understand the nuances that can affect payments.
When you work and pay Social Security taxes, you earn credits. Those born in 1929 or later need at least 40 credits—usually 10 years of work—to be eligible for benefits unless they are disabled or the survivor of a deceased worker.
The federal government bases your benefits on the 35 years of work in which you had the highest earnings. For each year less than 35 years of work, it credits you with zero earnings, which will lower your monthly payment.
“If you want to maximize your payments, do what you can to get to those 35 years,” says Stephen Tally, chief operating officer at Leo Wealth in Iselin, N.J.
It’s also best, when possible, to work long enough so that later years in which you earned more are the only ones among the 35 factored into your Social Security benefits, he says.
For example, if you earned a low salary for several years in your 20s, and worked 33 years later in life in a much higher-paying job, two years of those lower-earnings years will be factored into your benefits.
But if you were to work two more years later in life at a higher salary, it could substantially boost your Social Security payment. (Find more information on the formula used to calculate your benefits on the administration’s website as well as calculators to estimate your benefits at various ages.
Delay filing for benefits until age 70: Anyone who is entitled to Social Security benefits may begin claiming them at age 62, but if they wait until their full retirement age, they’ll get a larger payout. And those who wait until after their full retirement age will receive an even larger boost to their benefits.
For those who claim Social Security at age 62, their benefits are reduced by a small percent for each month before their full retirement age. Your full retirement age depends on your date of birth. (Check your full retirement age on the Social Security Administration’s website.
If a recipient whose full retirement age is 67, for example, claims benefits at age 62, their monthly payment of $1,000 would be reduced by 30% to $700. (Check how much your benefits will be reduced if you claim early.)
Tally says his firm discourages claiming early because the reduced benefit is “so punitive.”
In contrast, those who put off claiming benefits beyond their full retirement age receive a “delayed retirement credit”—a 5.5% to 8% annual increase in their benefits, depending on when they were born—until they reach age 70. For example, if you were born after Jan. 1, 1943, or later, you would receive 8% more for each year that you put off collecting benefits until age 70.
The difference can be sizable. If you were born in 1957, and claim benefits at your full retirement age of 66½, you would receive 100% of your monthly benefit. If you delay until age 70, you would receive 128% of your monthly benefit. (See how delaying receiving Social Security affects your monthly benefits.)
“If you live until 90 or 92, that’s not a small number,” says Tally.
You needn’t continue working to get that annual delayed retirement credit, notes Audrey Blanke, a financial planner at Baird in Milwaukee. “You can stop working at 62, and not take benefits until 70, which allows your benefit to keep growing,” and that credit will still be applied, she says.
However, it’s important to remember that your monthly Social Security benefits don’t increase after you reach age 70 so there’s no incentive to wait longer.
When to begin collecting benefits is a personal decision that may vary based on factors including life expectancy, cash needs, and whether or not you’re married, says Blanke.
Your risk profile, other income and other assets, such as real-estate holdings, are also among the factors to consider, says Chad Parks, founder and chief executive officer of financial technology company Ubiquity Retirement + Savings in San Francisco.
Those who have sufficient retirement savings invested conservatively may want to tap that money first, and wait until they’re 70 to claim Social Security, he says. But those comfortable with investing their savings more aggressively might want to take their Social Security benefits at age 62, which means a reduced monthly payment, but gives their assets more time to grow, he says.
Use your spousal benefits. Many people don’t realize that even though they’ve never worked or haven’t earned enough credits, they can collect up to one-half of the Social Security benefit their spouse is entitled to at their full retirement age.
This may apply even to those who are divorced after a marriage of at least 10 years. Widows and widowers can receive up to 100% of the benefit their deceased spouse was entitled to.
In most cases spousal benefits may be collected only after your working spouse has claimed his or her benefits. The exceptions to this are narrow and apply only to those who have filed for benefits before April 30, 2016, and divorced spouses. How much you’re entitled to will depend on your spouse’s age and work history, your age and work history and when you claim.
If you were born on Jan. 2, 1954, or later and are entitled to your own benefits, when you claim Social Security, you’ll receive the greater of either your personal benefits or your spousal benefits. However, if you were born before that and have reached full retirement age, you can choose to receive your spousal benefits and delay receiving your own benefits until a later date.
Spousal benefits can be collected as early as age 62, but they’ll likely be reduced if you claim before your full retirement age unless you are caring for a child entitled to receive benefits on your spouse’s record who is younger than 16 or disabled.
But unlike personal Social Security benefits, spousal benefits don’t grow beyond your full retirement age, so there’s no point in delaying beyond that age. (The Social Security Administration offers a calculator to help you determine your spousal benefit.)
If both spouses are entitled to their own Social Security and want to claim it before their full retirement age, they may be better off if the lower-earning spouse files first and the higher-earning spouse defers claiming. The growth of the delayed retirement credit will be a lot bigger for the higher earner, notes Blanke.