How to Maximize Your Social Security Retirement Benefits
Welcome to Part 2 of our Understand Your Social Security series. In this installment, we’ll focus on what you need to know to get the maximum retirement benefit from your Social Security.
Why is this important? According to the latest survey by the Employee Benefit Research Institute, there’s a big gap between workers’ expectations about retirement… and the realities.
By the end of this article, you’ll have the information and tools to point you in the right direction, and steps you can take to put this knowledge into action.
Let’s get started.
How Do Social Security Retirement Benefits Work?
Your benefit is based on your average indexed monthly earnings (AIME) during your 35 highest-earning years, adjusted for inflation.
Only earnings below a certain annual limit, called the contribution and benefit base, are included in the calculation. For example, the contribution and benefit base in 2024 is $168,600.
If you work less than 35 years, zeros (representing the years you didn’t work) are averaged into the calculation, lowering your benefit. Working longer can also increase your benefit if you earn more than in previous years.
Your benefit is based on a percentage of your AIME in three income brackets. These brackets are defined by the “bend points.”
These bend points make it so that low-earners receive a higher proportion of their pre-retirement income than high-earners. They change every year based on the annual wage index.
For example, for workers who reach full retirement age in 2024, the bend points are $1,174 and $7,078. This means that your benefit is equal to:
- 90% of your AIME up to $1,174, plus
- 32% of your AIME between $1,174 and $7,078, plus
- 15% of your AIME over $7,078.
You’re eligible for Social Security if you’re 62 or older, and you’ve worked and paid taxes for 10 years or more. You may also be eligible to collect monthly benefits based on your current (or in some cases, former) spouse’s work history. You can check your eligibility here.
While 62 is the earliest age you can start collecting your benefits, this does NOT mean you should claim your benefits at that age.
What Is The Best Age To Start Drawing Social Security?
The best age to start drawing Social Security benefits depends on your personal and financial situation, such as your health, life expectancy, income needs, and other sources of retirement income and assets, including 401ks, TSPs, Roth IRAs, IRAs, etc.
However, there are some details you need to know to avoid painful mistakes. The first is your Full Retirement Age (FRA).
Your FRA is Set by the Social Security Administration and is determined by the year you were born. FRA is the age you can claim 100% of your benefits.
Why does it matter? Claiming your retirement benefits prior to your FRA, means your benefit will be permanently reduced.
Suppose you were born in 1960 and your full retirement age is 67. If you start receiving benefits at age 62, your benefit will be 30% lower than if you wait until age 67.
That’s a hefty price to pay for jumping the gun.
You also have the option to delay until age 70, in which case your benefit will be 24% higher than if you claim at age 67 (more on this below).
This amount will also change in accordance with any cost of living adjustments (COLA) due to inflation.
The Benefits of Delayed Claiming
Delaying Social Security benefits might initially seem counterintuitive. After all, you’ve been contributing to this system for years, and the temptation to start reaping the rewards as soon as possible can be strong.
However, patience in this context can be a financial virtue. When you delay claiming benefits beyond your Full Retirement Age (FRA), those benefits grow.
Specifically, for each year you delay up until age 70, your benefits could see an increase of up to 8% per year through the system’s delayed retirement credits (DRC). Plus COLA/inflation
Consider this: if your full benefits amount to $2,000 per month at your FRA, delaying until age 70 could mean an increase to around $2,640.
That’s an extra $7,680 per year, which can make a significant difference in your retirement lifestyle. When you factor in the cost of living allowances due to inflation, this number is likely to be even greater.
There is no one-size-fits-all answer though, and the right claiming strategy for you may not be the right one for another person.
So How Do I Get The Most From Social Security?
The first thing I recommend is to create a ‘my Social Security’ online account and explore their website’s resources. It offers calculators, life expectancy estimates, and a breakdown of benefits, arming you with data to make informed decisions.
For example, this calculator will tell you your FRA in two seconds. Write it down, highlight it, do whatever it takes to imprint this number in your mind.
Here are all the tools you can use to get a clearer picture of the path ahead.
Next, consider the broader picture of your retirement income. Just because you’re retired does NOT mean you have to begin taking your Social Security benefits. How does Social Security fit with your other income streams like pensions or consulting work — or with your assets, like your TSP, 401k, savings, and investments?
Delaying benefits might mean leaning a bit more on these income streams and taking distributions from your assets in the early years of your retirement.
It’s important to keep the big picture in mind when making the decision on your Social Security benefits.
Finally, consult with a reputable financial advisor to discuss the implications of claiming benefits before or after reaching your FRA. The decisions you make here will have long-lasting repercussions on your financial stability in retirement.
If you want clarification on when and how to claim your Social Security benefits…
Final Word
As we’ve explored in Part 2 of this series, determining the optimal claiming strategy, whether early, at your FRA, or later, hinges on your individual situation.
Life expectancy, tax considerations, inflation, and other sources of income, ultimately influence the break-even point.
There is “no one size fits all.” A personalized strategy is the best course of action.
Deciding when to take Social Security is one of the most impactful financial decisions you’ll ever make. Your financial advisor can help you make an informed decision that works best with your overall financial strategy.
If you don’t have a trusted financial advisor, or if you’re not satisfied with your current advisor, we’d love to see if we can help.
Take the first step today.
In the meantime, keep an eye out for Part 3 of our Understand Your Social Security series: Survivor and Disability Benefits, taxes, and the power of coordinated planning.
The opinions voiced are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
No strategy ensures success or protects against loss.
All investing includes risks, including fluctuating prices and loss of principal.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Good Life Advisors, LLC, a registered investment advisor. Good Life Financial Advisors of NOVA and Good Life Advisors, LLC, are separate entities from LPL Financial.
