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How to Get More Bang for Your Social Security Buck

Should You Claim Sooner or Later?

In 1935, President Franklin Roosevelt signed into law the original Social Security Act. Social Security is funded primarily through payroll taxes collected by the IRS. With a few exceptions, all salaried income, up to an amount specifically determined by law, is subject to the Social Security payroll tax.

Social Security is generally associated with the payment of retirement benefits. There are many complicated calculations the Social Security Administration (SSA) uses to determine when and if someone is eligible and how much money they will receive per month, but the general idea is just that: When an individual who has been paying Social Security taxes long enough reaches a certain age, they may claim those funds in the form of monthly checks.

Based on your birth year, there is an age at which you may receive (claim) 100% of the calculated Social Security benefit — the full retirement age. Claiming a little early is allowed, but that reduces the percentage. Currently, full retirement age is 66. Someone claiming at 66 years old receives 100% of their Social Security benefit. If someone chooses to claim at 62, they receive 75% of their Social Security benefit — forever. The age at which you first claim determines how much you receive for the rest of your life. So, if an individual has waited and claims at 70, they receive 132%.

“More money is more better!” you might say. There are a couple directions you can go when deciding whether to go ahead and claim as early as possible or to wait.

Reasons to Wait

The SSA bases the amount of benefit you will receive on your best (highest) 35 years of earnings. When you turn 62, if your salary has been steadily increasing as you age, those 35 years would be the last 35 years you worked (ages 27 through 61). However, if at 62, you decide to work another year and claim your Social Security benefit at age 63, your 62nd year’s salary would replace your 27th year’s salary because it was the lowest of the 35, boosting the amount the SSA would use to determine your benefit.

Also, because you waited another year, the SSA will reward you by giving you a higher percentage — approximately eight percent. That’s still not 100%, but it is more than 75%. If you want 100%, you have to wait until your full retirement age.

Why to Go Ahead

While waiting does increase the amount of benefit you receive from the Social Security Administration, that doesn’t guarantee more money in the long run. According to CNN, “despite the increase, you won’t break even on your decision to wait until you reach about 80 years old.

“For example, if you are slated to receive $1,000 per month at full retirement age, you can receive $750 per month if you claim at age 62 or $1,320 per month if you claim at age 70. If you claim at age 62, you would collect a total of $81,000 in Social Security benefits at age 70, $135,000 in benefits at age 75, and $171,000 in benefits at age 80. Alternatively, if you claim at 70, you would pocket $95,040 in benefits at age 75 and $174,240 in benefits at age 80. It’s not until you reach 80 that the amount that you have collected in Social Security surpasses the amount you would’ve collected by claiming at age 62.”

The average lifespan of an American is almost 79 years, according to The World Bank. Based on CNN’s example, the average American will actually make more money claiming early.

CNN goes on to say that if you’re a 62-year-old who can continue to cover your monthly expenses because you receive a pension or continue to work, “you could invest your $750 per month in Social Security income rather than spend it. If you did that and earned a hypothetical 6% annually, then you could end up with a portfolio valued at $422,966 at age 85 and $616,758 at age 90. Waiting and investing your $1,320 per month in the same investment produces a nest egg worth only $368,693 at age 85 and $582,686 at age 90.”

“What should I do?”

Unfortunately, there is no one answer that fits everyone’s situation. CNN says it best: “There are a lot of personal reasons why you might want to claim Social Security early or wait to claim it. Carefully consider all your Social Security options, including various claiming strategies, before you make your final decision. After all, if you claim early and change your mind, you only have one year to withdraw your claim.”