Some politicians may disparage Social Security, calling it broken and trying to convince America’s workforce to hate paying into the system by claiming it won’t be there for them later in life. Nevertheless, the fact is that Social Security is the one program that keeps most retired Americans from living in poverty. Indeed, poverty rates, which are just 8.8 percent, would balloon to an estimated 40.5 percent if Social Security didn’t exist.
If you thought Social Security was not a cornerstone of your retirement plan, think again. It’s essential that you understand how benefits work and how to get the largest check possible once you retire.
The Maximum Benefit
In 2017 the maximum benefit check a retiree can get is $3,538, but fewer than 6 percent of workers will be eligible for that amount, just based on income. You would need to average $127,000 per year for the past 35 years and delay getting a check for as long as possible. The average Social Security paycheck is only $1,369.97—barely more than one-third of the maximum amount and much lower than retirees could get if they were to wait.
Why Wait to Get Paid?
It’s your money, so why would you potentially work longer to delay Social Security benefit checks? Because waiting means more money.
Social Security works on a credit system. Once you earn 40 lifetime work credits, you can enroll for benefits beginning at age 62. That means you can also start receiving checks at that time. Sounds like a good deal, but it’s actually a really bad idea.
If you start receiving checks at 62, you only receive 75 percent of your monthly benefits, because you’re taking payments 48 months earlier than your full retirement age of 66 (if you were born between 1943 and 1954). If you wait until you turn 65, you receive 93.3 percent of your full benefit amount, and if you wait until age 66 you get 100 percent. Waiting until your full retirement age increases your payout by 25 percent.
The two main reasons to collect sooner: You really need the money and your health situation means waiting might not pay off for you.
But that’s not the end of the story. If you wait longer than your full retirement age, you get paid even more. Remember that maximum paycheck of $3,538? If you averaged $127,000 over the past 35 years and took benefits at your full retirement age of 66, you would still only see a check of $2,687.
To reach the full amount you need to forego benefits until you reach age 70. This doesn’t apply just to the maximum paycheck. Regardless of your average earnings over the past 35 years, you will see a much larger check if you wait until age 70. If birth year, income and work history are equal, a retired worker who waits to take benefits at age 70 will earn up to 76 percent more than the same worker taking benefits at age 62.
There’s not much that isn’t taxed, but for many people, Social Security benefits come with zero tax liability. Whether you’re taxed depends on your income. If you’re married filing jointly and taking Social Security benefits, and you have between $32,000 and $44,000 in combined income, you may have to pay taxes on up to 50 percent of your Social Security benefits. If your combined income is more than $44,000, you could be taxed on up to 85 percent of your benefits. This doesn’t just apply to married couples; singles have maximums as well ($25,000 and more than $34,000 are the relevant amounts).
If you can afford to wait, don’t take Social Security benefits until waiting no longer pays—at age 70. Your benefits check will be significantly higher. Spousal benefits, which are based on the size of your check, will also be higher.
The caveat? According to Social Security, if you live to your average life expectancy, foregoing benefits won’t create much financial gain. Nevertheless, as medical science makes more breakthroughs, people are living longer. The younger you are now, the more likely you are to live longer later in life.