Four Ways to Improve Social Security Benefits

How Social Security calculates payment is complex, and a few fundamental concepts can improve lifetime benefits for millions of Americans whose most reliable income source is the Social Security program.

In most circumstances, a family’s primary earner should defer claiming Social Security until 70. Suppose you’ve worked fewer than 35 years or had some low earnings; each year you work could enhance your income. Due to a Social Security peculiarity, this is especially true after 60.

Social Security can be important for high-income households, too. Two high-earners can receive $100,000 a year in benefits if they both wait until 70. This compensation will climb annually with inflation, as it did last year with a 5.9% cost-of-living adjustment for rising consumer costs.

Here are four ways to improve Social Security benefits:

Earning experience of 35 years

Social Security bases benefit on 35 high-earning years. Even if you’ve worked fewer years, your earnings are adjusted for wage inflation and divided by 420 (35 times 12) to determine your average monthly wage. It applies a formula that favors low incomes to calculate your monthly payout at full retirement age. 

People who worked fewer years or earned little get reduced benefits. William Reichenstein, chief of research for Social Security Solutions, which sells Social Security optimization software, says a mom born in 1960 earned $84,000 a year but stayed home for 20 years after her children were born. If she starts collecting Social Security, she’ll have 20 years of wages, and Reichenstein estimates she’d collect $1,874 a month in retirement. He explains that if you have 20 years working plus 15 years of raising children, those 15 are zeros.

Suppose she resumes her $84,000-a-year job. Reichenstein calculates that her Social Security will grow by $64 a month for every year she works. If she works five years, that’s a 17% increase. Delaying Social Security from 67 to 70 will boost her benefits by 24%. Reichenstein thinks doing both might increase her $1,874 benefit to $2,720.

Working in your 60s can be gratifying.

Social Security adjusts your salary to the average wage the year you turn 60. For example, in 2019, you’re 60; Reichenstein says Social Security would convert $30,000 from 1984 to $100,588 in 2019. And so on, with yearly adjustments.

After age 60, Social Security only recognizes nominal earnings, not inflation-adjusted ones. Increasing wages are still compared to lower average wages in the year you reach 60. After you reach 60, your average monthly earnings can rise, especially if you haven’t worked for 35 years.

Maximize the Bigger Check

Assume you and your spouse are both 62 and plan to start Social Security in five years when you reach 67. You will be eligible for $3,000 per month and your spouse for $2,000 per month. Instead of both taking Social Security at full retirement age, it’s frequently better for your spouse to receive benefits early and for you to wait as long as possible, ideally until age 70.

Why? Social Security pays the survivor a larger benefit when one of you dies. So it is a good idea to maximize one of the benefits.

There are times when the big earner should file earlier, such as if they and their spouse are in poor health and won’t live long.

Collecting Items

Each month you delay Social Security after 62, your benefit increases by 76% by 70.

Some years your benefit rises more than others. If you were born after 1960, delaying from 63 to 64 increases your benefit by 6.67 percent, and Reichenstein says you can earn 8.34% between 64 and 65.

After 67, nothing changes. Your full retirement benefit will grow by 8% yearly but not compounded.

Assume you’ll get $1,000 at age 65. Your $1,000 monthly payout will grow to $80 if you wait a year to collect. Another year will add $80, but that’s only a 7.4% rise on your new base of $1,080. The extra $80 is a 6.9% rise on your base of $1,160.

According to Social Security optimization software seller Laurence Kotlikoff, if you start collecting benefits at full retirement age, Social Security won’t increase them until the following year.

Say you turn 65 in December and wait six months to start Social Security. Your delayed retirement credits increase your monthly benefit by 4%. However, Social Security won’t increase your benefit until the new year, so that you will receive the same benefit until January. 

If you’re 70, when you file doesn’t matter. You’ll get the full benefit, including the delay bonus, instantly.