How to Maximize Your Social Security Payments

You’ve worked hard for many years, paying into the Social Security system, and now you’re approaching retirement age and would like to draw your benefits. I’m often asked by clients if it would be wise for them to start taking their Social Security payments, and like many answers to financial questions, it depends.

There are several factors to consider that can guide you to the right answer for your particular situation. Take a look at some of these factors to determine the best course of action for you.

1. Remember that the longer you wait, the larger your payments.

According to the Brookings Institution, in 2009, 42% of 62-year-olds claimed benefits, up from 38% in 2007. Clearly, more and more 62-year-olds are taking advantage of their Social Security benefits earlier than in previous years. But is this the best decision? What do you think?

In the following table, you’ll find that the age at which you start withdrawing your payments matters. The sooner you withdraw payments, the less you’ll be paid every month. Conversely, the longer you wait to withdraw, the larger your payments. Let’s assume you’re eligible for $1,500 per month if you wait to withdraw until age 66. Take a look:

There are obvious benefits to starting your Social Security benefits at a later age, but it’s important to consider other investments as well. Could you make a better return by taking Social Security payments sooner and investing the money? Or maybe you don’t plan on retiring until age 70, and you’d like the security of having a larger monthly payment by waiting to withdraw your benefits.

As you can see, everyone’s situation is different, and it’s important to consider this important factor when trying to maximize your Social Security payments.

2. Take advantage of the 62/70 strategy.

Keeping in mind that the longer you wait, the higher your payments, there’s a fantastic strategy for married couples that allows them to maximize their Social Security benefits. It’s called the “62/70 strategy,” because the lower-earning spouse would file for Social Security at age 62, while the higher-earning spouse would postpone payments until age 70.

Keep in mind, that regardless of which spouse passes away first, the lesser benefit will be cancelled at that time. Here’s a snippet from CBSNews.com that gives an excellent example of how this strategy works:

Here’s how T. Rowe Price’s Fahlund says 62/70 could work: Assume John’s full benefit will be $2,157 a month. His wife Jane’s full retirement benefit will be $1,081 a month; at 62, she’d receive $721 a month. Jane applies for her $721 benefit at 62, and John delays claiming his checks until 70, when he’ll collect $3,303. If John dies at 82, his monthly benefit will have grown to $4,601 because he had waited until 70 to start collecting. That $4,601 then becomes Jane’s survivor benefit, and it will be 88 percent more than Jane would have received if John had begun collecting at age 62.

Furthermore, the article goes onto explain that John in this example could apply for a spousal benefit at age 66 which would be based on Jane’s work record while his own benefit would continue to grow. It’s important to note that John couldn’t have done this before age 66. Read further:

Because he has reached his full retirement age, John qualifies for the maximum spousal benefit: $541 a month, or 50 percent of Jane’s $1,081 benefit. When John hits 70, he’ll drop the spousal benefit and start collecting his own larger benefit.

The 62/70 strategy is just one more way to maximize your Social Security payments. Consider it as a part of your retirement planning.

Final Thoughts

By keeping these two concepts in mind, you (and your spouse) will draw more money from Social Security. However, remember that you’re going to need to consider the big picture of your financial plan before making a decision.

Should you have the ability to identify and manage high-yield investments, it might be more advantageous to take Social Security payments sooner rather than later, so that you can turn around and invest the money for a better return.

But numbers aren’t the only thing that matters – you’ll have to consider your other sources of income as well as your lifestyle. If you’re depending on Social Security alone once you hit retirement age, you may have no other choice but to take payments as soon as possible. You have to be able to keep a roof over your head and put bread on your table. On the other hand, if you’re sitting pretty with a large nest egg in IRAs and 401(k)s or have income from real estate, delaying Social Security payments is certainly worth considering.

If you would like some help navigating wealth-building or retirement, consider contacting a Certified Financial Planner™ who can point you in the right direction.

Are you nearing retirement? What are you considering regarding your Social Security benefits? Leave a comment!