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How to Maximize Your Social Security Benefits

Every year, roughly 1 million retirees face the same troubling question: Should they wait until age 65 to claim their Social Security benefits or do they claim benefits earlier?

If they wait, they get more. But does the extra amount make up for the cost of waiting? There is great debate, with some experts urging retirees to “go for the gold” as soon as possible, while others argue that given today’s long life spans, you’re better off waiting.

So what’s the right answer? Both. Or rather, either answer could be right depending on your circumstances. That’s because Social Security is highly complex and a variety of factors will determine what the best answer is for you, says J. Robert Treanor, manager of the Social Security division at the employee benefits consulting firm of William M. Mercer Inc. in Louisville.

Here are some answers to questions about those factors and how they affect your benefits.

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Q. How are Social Security benefits calculated?

A. You need 40 quarters of work to qualify for benefits on your own account. Your benefits are calculated based on your average lifetime earnings.

Recent work years carry more weight in the benefit calculation, both because inflation has boosted earnings and because you’re paying more Social Security tax today than you did decades ago. In 1953, for example, the maximum annual Social Security tax amounted to $54. Now it’s more than $5,500.

Then the benefit amount varies based on when you take benefits--at age 62, 65 or later. In short, the longer you wait, the more you get each month. But when you wait, you obviously miss out on a number of Social Security checks.

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Q. How much less do I get when I retire early?

A. Your benefits are reduced by 5/9 of one percentage point for every month that you get benefits before your 65th birthday.

Consider a hypothetical retiree, Sam, who is due $1,000 monthly at age 65. He would get about $933 if he elected to take benefits at age 64 and about $866 if he took the benefits at age 63. If he claimed Social Security in the first month possible--one month after his 62nd birthday--he’d get $805, says Treanor.

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Q. Is the benefit increased to the full $1,000 at age 65?

A. No. It’s permanently reduced. Sam will receive just $805 monthly for the rest of his life.

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Q. What about spousal benefits? Are they also reduced when the primary wage earner retires early?

A. No. Spouses are entitled to 50% of the primary wage earner’s full insurance benefit, assuming that the spouse starts taking benefits at “normal retirement age"--that’s currently age 65. But if the spouse also elects to take benefits early, the spousal benefits are reduced by 25/36 for every month before age 65 that they’re claimed. In other words, if Sam’s wife, Helen, elects to take benefits at age 62, her $500 spousal benefit would be reduced by 25%, or $125. She’d get $375.

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Q. What if Helen’s own benefits would be worth more than $500?

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A. Then she’d take benefits based on her own work record, not her husband’s. And if she retired early, her benefits would be reduced by the 5/9 of one percentage point for every month before age 65 that she claimed Social Security, rather than the more costly 25/36 spousal calculation.

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Q. If you’re going to get 20% or 25% more for the rest of your life by waiting just a few years, wouldn’t you be wise to wait?

A. Not unless you live a very long time, says David Hemstreet, a Pasadena-based financial planner.

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Let’s go back to Sam’s case to illustrate why. He takes the reduced benefits of $805 monthly and collects those checks for an extra 35 months. At age 65, he’s already collected $28,175.

His full benefits would be $195 more a month. But it would take 12 years, or 144 months, to collect the same $28,175, says Treanor.

Additionally, if you assume that Sam invests his $805 at an average annual rate of 8%, he would be 83 before he broke even by waiting to take benefits at age 62, Hemstreet adds. If his investment earnings are less, of course, the break-even point would come a bit sooner; if his investments earn more, he’d be older before breaking even.

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Q. What if you don’t invest the money--you simply use it to pay your bills?

A. Then the break-even point is at age 77 when you’ve collected the $28,175 through boosted benefits that you would have collected in the three year-span between ages 62 and 65.

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Q. You never know how long you’re going to live, so how can you determine which answer generates the best result?

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A. If Willard Scott is consistently broadcasting birthday greetings to your 100-year-old relatives, you probably ought to wait--assuming, of course, you have the luxury of waiting because you don’t need the money to pay your bills. But if your family’s longevity isn’t anything to crow about, you’re probably better off by claiming Social Security the moment you’re eligible.


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