Photo of Ray Ferrara CFP Ray Ferrara CFP Aug 05, 2020

Unfortunately, too many people just sign up for Social Security without realizing how many different alternatives exist.  Even worse, the Social Security Administration often gives faulty advice which can cost tens of thousands of dollars or more over a recipient’s lifetime.  In a survey by Nationwide in 2019, 92% of those surveyed were unable to identify how to maximize the benefit to which they were entitled.

Your Social Security benefit is calculated by taking your 35 highest years of earned income with an adjustment for inflation.  However, you only get credit for 90% of your Average Indexed Monthly Earnings (AIME) on the first $926, 32% of income from $926 to $5,583, and 15% of everything above $5,583.  These thresholds are adjusted for inflation periodically.  If you think this is complicated, deciding how to get the maximum benefit is even more complicated.  (see below)

According to Social Security Administration, this year the average monthly benefit is $1,503 and is paid to approximately 45 million retirees.  Nine out of ten individuals over the age of 65 have some Social Security benefit with it representing at least 50% or more of the income for 70% of individuals and 50% for those that are married.  For those that are fortunate enough to be high wage earners the maximum benefit in 2020 is $3,011 at Full Retirement Age (FRA) which is age 66 and 8 months currently.

You can start as early as age 62, but if you do, then your benefit is reduced by 0.56% for each of the first 36 months and 0.42% for every month over that if you take Social Security prior to FRA.  A $1,000 benefit at FRA is only $717 at age 62.  Additionally, if you are working and take the benefit before FRA and your earned income exceeds $18,240 in 2020, then your benefit is reduced dollar for dollar above this amount.  There is no penalty once you reach FRA if you continue working.  Then why would you even think about taking it early?  You need the income or you are in poor health and have a shortened life expectancy are two very good reasons. 

On the other side of FRA, you might consider delaying until age 70.  For each month after FRA you wait, your benefit increases by 0.66%.  Thus, a $1,000 benefit at FRA could become $1,266.  If you do not need the income at FRA either because you are still working or have adequate cash flow without Social Security, and especially if you anticipate a long life expectancy, then delaying might make sense.  The maximum benefit in 2020 at age 70 is $3,790, or $45,480 for the year.

If you are married to the same person for 10 years or more, you can take either 100% of your benefit or 50% of your spouse’s benefit whichever is higher.  Thus, the maximum benefit for two high wage earners is about $91,000, but with only one spouse at the maximum, it is still about $62,000.  The 100/50% option still applies, even if you are no longer married, as long as you were married for ten years.  Should the spouse with the higher benefit die, then the surviving spouse will get a higher benefit but lose their own benefit. 

There is not enough room to delineate all of the alternatives and permutations.  While the combinations are not endless, it can lead to over 500 ways to take Social Security according to bankrate.com.  It is not something you want to do on your own.  Without good software to guide you, you can be costing yourself a lot of money in retirement.  Would you like to know your best alternative?  For the first 25 people who call our office (ask for Beatrice or Oscar), we will provide you with a complimentary report.