silviarita / Pixabay
Quick notes:
- Even though you can claim benefits at 62, the longer you wait to collect, the bigger your payout can be.
- One way to help maximize your benefits is to delay claiming them for as long as you can.
When it comes to your retirement, Social Security is an important piece. Social Security benefit payments are also put in place to help retirees, families of retirees or deceased, and disabled persons to live off a monthly income.
The more you know about the program, the better equipped you will be to maximize your benefits and make important financial decisions.
This social security overview will lay out everything you need to know about when to withdraw your benefits and how to maximize them.
What is Social Security?
The Social Security program works on a pay-as-you-go model. The current workforce pays Social Security taxes into a pool and the revenue the program makes goes to beneficiaries in the form of monthly income.
In addition to being of age, if you are a spouse or child of a Social Security recipient who has passed away, you can also be eligible to receive Social Security payments.
You can also collect Social Security benefits if you are determined to be disabled after a disability determination process.
You can create an account on the Social Security website to see your eligibility information.
How Social Security works
For those who are retired, the Social Security Administration keeps track of your employment records and yearly earnings during your career up to the earnings cap.
The payroll maximum is $132,900 for 2019. This means that a maximum of $132,900 is the amount of earned income that is taken into consideration when your benefit payment is calculated for 2019.
The Social Security Administration indexes the total earnings each year for inflation. Your top-earning 35 years of income are added together and then divided by 420. This is the number used because that is how many months there are in 35 years.
When to withdraw your benefits
Even though you can claim benefits at 62, the longer you wait to collect, the bigger your payout can be. You accumulate credits throughout your working career which will determine how much you can collect when you retire.
Age 67 is when you’ll be able to claim the full benefit amount you’re entitled to based on your earnings.
The earlier you claim your Social Security benefits, the lower your monthly benefit payment will be. Let’s say you claim your benefits at age 62, you will only receive 70% of the amount you’ve earned.
If you wait to collect your benefits until age 65, you’ll get 86.7% of your monthly benefit payment. You can potentially receive an 8% bonus for waiting to claim your benefits each year up to age 70. Because this bonus maxes out at 70, there is no point in delaying your withdrawal past 70.
How to maximize your benefits
Unfortunately, too many Americans don’t have enough money saved to live during retirement. Many people acquire retirement income from several different sources including savings and 401(k) plans, in addition to Social Security.
While you may be able to live only off of Social Security benefits, it may be tough. One way to help maximize your benefits is to delay claiming them for as long as you can. Ideally, this is age 70.
To help maximize Social Security, you may be able to get a part-time job doing something fun and use a 401(k) or your savings to supplement your income so that you can delay claiming your benefits until you’re over 67.
In terms of how to adjust for life changes that arise, downsizing, eliminating debt, and simplifying your life are a few additional things you can do retirement in terms of stretching your money.
A deeper dive — Related reading from the 101:
If you’re worried about your financial independence, you may be missing the point of early retirement.
Adulting with your money is hard, but not impossible. These five steps should get you on the right track.