Retirees often sign up for Social Security payments as soon as possible, at age 62. And who can blame them? In just seven years, program costs will exceed tax revenues, according to the most recent Social Security Board of Trustees report. And the trust fund is expected to be exhausted in 2037. But claiming Social Security at age 62 probably won't get you the highest payout. Here are a few potential claiming strategies that could significantly increase your Social Security income for the rest of your life.
Delay claiming. Workers become eligible for Social Security beginning at age 62, and many sign up right away. Applications for early retired worker benefits are up 25 percent so far this year compared with fiscal year 2008, because of a combination of factors: the sagging economy, aging baby boomers, and women claiming based on their own working record and not a spouse's. However, if you begin claiming at age 62, your checks will be reduced by 25 to 35 percent. Baby boomers born between 1943 and 1954 should wait until age 66 to sign up if they want to receive their entire due. For employees born between 1955 and 1959, the full retirement age gradually increases from age 66 and 2 months to 66 and 10 months. The retirement age is 67 for those born in 1960 and later. Benefit checks increase by about 7 to 8 percent for each year you delay claiming up until age 70. Retirees who sign up at younger ages get smaller payments over a longer period of time, while those who wait get larger checks for their remaining years. "I would argue they would be better off claiming later because then they get a higher benefit and because you are getting more insurance against outliving your assets because Social Security benefits last as long as you live," says Andrew Biggs, a resident scholar at the American Enterprise Institute and a former deputy commissioner of the Social Security Administration. Of course, if you have a reason to believe you won't live a long life, it's best to sign up right away.
Work longer. Social Security payouts are based on your 35 highest-earnings years in the workforce. Every higher-paying year you work in your 50s and 60s effectively cancels out a year when you earned less in your 20s. "I basically think working longer is the most important thing that people can do to protect themselves," says Alicia Munnell, director of the Center for Retirement Research at Boston College. "If you have a job and you can stay there, working as late as you possibly can is the way to have the most secure retirement." Still, your Social Security checks may be temporarily reduced if you continue to work after you sign up for Social Security—but the payouts will increase later. Social Security beneficiaries may earn up to up to $14,160 in 2009 without penalty. After reaching that earnings cap, Social Security checks will be reduced by 50 cents for each dollar earned. The year you reach your full retirement age, the earnings limit increases to $37,680, and benefits are reduced by only about 33 cents for each dollar your earn above that earnings limit. Bonuses, commissions, and vacation pay count toward the earnings limit, but pensions, investment income, interest, annuities, and government or military retirement benefits won't affect your due. After your birthday, any amount you earn is without penalty. And your benefits aren't withheld forever. Once you reach your full retirement age, your benefits will be recalculated to give you credit for your enhanced working record.
A free loan. If you signed up for Social Security at age 62 and your checks have been reduced, you can still get the higher payout at age 70. The catch: You have to pay back every cent you've received without interest. A savvy investor could feasibly collect and invest their Social Security benefits, pay back the amount received, and keep the interest. "If you can invest the money at any positive interest rate, it's a good deal. There's money to be made," says Biggs. "You have to have money around to repay those benefits." To receive more than a traditional worker claiming Social Security at age 62, a Social Security recipient using this strategy who claims at age 62, invests the income, pays it back at age 70, keeps the interest, and then begins receiving higher payouts will need to live until at least age 81, according to calculations by the Center for Retirement Research at Boston College. If you should pass away shortly after paying back the benefits, you'll lose money. The cost for taxpayers of retirees using this claiming strategy: between $5.5 billion to $11.0 billion annually.
[For pointers on what you should be doing now, see this Retirement Timeline.]
Marital strategies. Couples have more options to maximize their Social Security payouts. Married workers are entitled to Social Security benefits based on their own earnings, or they may receive a payout equal to 50 percent of their spouse's benefit. The amount is lower if either party collects before full retirement age. Although it's generally better for single men to claim early because of their shorter life expectancy and for single women to delay claiming because they are likely to live longer, the opposite is true for couples wishing to boost their total payout. In general, couples can maximize their joint Social Security payouts by having the lower earner sign up as soon as possible at age 62 while the higher earner waits as long as possible to claim, ideally until age 70, according to Boston College. This strategy typically maximizes the couple's benefits. The husband is generally the higher earner, older than his wife, and has a shorter life expectancy, so the wife will get a smaller payout based on her own working record. But then she'll get bumped up to the higher survivor's benefit when her husband passes away. "For married women, the period over which they receive their own benefit is only until their husband dies," says Munnell. "Once their husband dies, they then claim the widow's benefit." The survivor's benefit for spouses is the full amount of Social Security the higher earner received. The longer the higher earner works, the higher the benefit his surviving spouse will receive. If one spouse doesn't have his or her own working record, the higher earner can claim and immediately suspend his retirement benefits at his full retirement age. This will allow the nonworking spouse to receive a spousal benefit based on the working spouse's earning record, while still allowing the worker to get a higher payout later for delaying claiming.
Claim twice. Couples with two incomes have an additional Social Security option. Each can actually claim Social Security twice. But there are a few caveats. Both husband and wife must have significant earnings, and at least one of them needs to be able to delay signing up until age 66. Although workers who file before their full retirement age get the higher of either a payout based on their own working record or a spousal benefit, those who wait until their full retirement age can choose which of those benefits to receive (and even receive both at different times). For example, if a husband claims his benefits at age 70, his 67-year old wife (who is above her full retirement age) can file for a spousal benefit based on his working record equal to 50 percent of his benefit. The wife can then continue working and contributing to Social Security, then file for Social Security benefits based on her own working record at age 70 and stop receiving the spousal benefit. In this scenario, the wife gains three years of spousal benefits. Plus, her own Social Security checks will be higher because she delayed claiming and spent more of her higher-earning years in the workforce. The cost: This Social Security claiming strategy could cost taxpayers as much as $9.5 billion per year. A significant amount of that additional money goes to upper-income households, according to a Center for Retirement Research at Boston College analysis.