By Adam K. Wright, CFA®, CFP®
The Social Security Administration just announced an 8.7% increase in 2023. That’s right, as the stock and bond markets have dropped 20% this year, likely cutting down IRA distributions for next year, Social Security benefits have increased along with inflation. When it comes to retirement, Social Security is a key benefit for most—if not every—retired worker. It’s an inflation-adjusted guaranteed income stream for life. The right claiming strategy can add safety to your retirement income and leave you collecting tens of thousands (if not hundreds of thousands) extra during retirement. So, as you approach retirement, be sure to understand how to maximize your benefits. After all, you paid into the program your entire career; make the most of it during retirement.
Although most Americans expect to retire later in life (around age 65 or so), the average retirement age is actually much lower. In 2022, the average retirement age was 61. Because there is a difference in Social Security benefits at certain ages, it’s important to increase your knowledge of Social Security and prepare to maximize your Social Security benefits as you enter the best years of your life. Let’s explore one of the most common questions for each and every pre-retiree: When and how do I claim my Social Security?
How Are Social Security Benefits Calculated?
Your Social Security benefits are calculated based on lifetime earnings. The Social Security Administration (SSA) calculates your benefit based on your 35 highest-earning years, with a minimum of 10 years of work required to be eligible for benefits. If you have worked less than 35 years, your earnings will be calculated with zeros for the years you have not worked. All past wages are indexed to today’s wages in order to accurately reflect wage growth.
Once your average monthly earnings for your top 35 years are calculated, a special formula is applied and the result is your primary insurance amount (PIA). The PIA is the benefit you are eligible to receive when you reach full retirement age (FRA).
Here is where the claiming decision matters: The actual benefit you receive may not be your PIA. Your PIA will be increased or decreased depending on when you choose to receive benefits. Taking benefits before FRA will reduce your benefit, and waiting until after FRA will increase your monthly benefit. Also, starting at age 62, your eligible benefits will receive regular cost-of-living adjustments (COLA), even if you’re not taking them yet.
Married people are eligible for benefits based on their spouse’s work history. The spousal benefit is 50% of the working spouse’s earned benefit. In order to receive these benefits, the working spouse must be at least 62 and have already filed for benefits. Collecting early, before your FRA, both your benefits and your spousal benefits will be reduced, also lessening the dollar increases from COLA.
Think about it like this: You decide to take Social Security at age 62 and collect $2,000 per month. The 8.7% COLA adjustment for 2023 will bring you to $2,174 per month. Compare that to the person across the street, who retired when you did, at the same age, but waited until age 66, their FRA, to take their Social Security. They collect $2,667 per month, and will see their monthly benefit increase to $2,899 in 2023. Claiming early not only lowers benefits, it also limits COLA adjustments.
If you are divorced, you may also be eligible to receive spousal benefits based on your ex-spouse’s work history. Your marriage needs to have lasted at least 10 years, you must be divorced for at least two years, and you must still be single. In addition, you need to be at least 62 and not eligible for higher benefits based on your own work record. Unlike spousal benefits for married people, your ex-spouse does not need to have filed for benefits in order for you to claim them. Maybe more importantly, your ex-spouse doesn’t even have to know you’re claiming this benefit.
When Can You Claim Social Security Benefits?
You can claim your Social Security benefits anytime between age 62 and age 70. If you continue to delay taking benefits after you reach age 70, there is no additional benefit increase. However, the age at which you choose to collect benefits before 70 will impact the amount of benefit you receive.
The J.P. Morgan Guide to Retirement has a great visual to understand claiming. It differs by birth year too:
You can start receiving benefits as early as 62, but your monthly benefit will be lower than if you waited longer. Your basic benefit is reduced a fraction of a percent for each month you begin receiving benefits prior to full retirement age. Retiring early can permanently reduce your benefit by up to 30% for those born 1960 or later.
Full Retirement Age
Your full retirement age (FRA) changes based on the year you were born. FRA is 66 for those born between 1943 and 1954 and increases by two months for every year after that you were born until it settles at age 67 for those born in 1960 or later. If you wait until you reach full retirement age to begin collecting your Social Security benefits, you will receive the full PIA that you have earned.
If you’re still working or don’t need the money immediately, you can delay receiving your benefits. Your benefit will increase by 8% for each year that you delay, with a maximum possible increase of 32%. You cannot delay and increase your benefit indefinitely, though. Once you reach age 70, your benefit amount will not increase any further.
When Is the Best Time to Claim Social Security Benefits?
While you are working, you can increase your future Social Security benefits by earning higher wages. Once you stop working, though, the only influence you have over your benefit is when you begin to take it. Your timing has a great impact on the amount of the benefit you will receive and should be carefully considered.
Many retirement academics seem to agree, the higher-earning spouse should try to delay claiming as long as possible, preferably to age 70. With increasing life spans, having the higher-earning spouse delay benefits leads to an increase in spousal benefits, survivor benefits, and overall lifetime income from the Social Security program.
The Social Security Statement Gets a Makeover
An important document you will reference during the decision-making process is your Social Security statement. The Social Security Administration mails statements to workers age 60 and over who aren’t receiving Social Security benefits and do not yet have a my Social Security account. These statements will be mailed out three months prior to your birthday, but you can also access the same information by setting up an account on their website.
We recommend everyone set up an account with ssa.gov. This way you can check if your earnings are being properly recorded, and review the progress of your benefits.
The personal Social Security statement, created to help you understand your Social Security benefits, has been redesigned for the first time. The new statement is shorter, uses visual elements and plain language, and includes fact sheets tailored to a person’s age and earnings history. Go create an account and check it out!
Page 1 contains personalized estimates of retirement, disability, and survivor benefits, along with a bar chart showing projected monthly retirement benefits at nine different claiming ages from age 62 to 70.
The statement will tell you:
- Your estimated benefit taken at different ages between 62 and 70:
- Your estimated disability benefit
- Your estimated family and survivor benefits
- Your Medicare information
- Your earnings history separated by decade
All benefit amounts listed are estimates and subject to change. They are calculated based on your date of birth and future estimated taxable earnings.
It is important for you to review your earnings history and check for accuracy. The recently redesigned statement has earnings separated by decade only, which means you will have to visit ssa.gov/myaccount to review individual earnings for every year.
Your benefit is calculated based on these numbers, so any mistakes can affect your benefits. You should correct any errors as soon as possible.
Page 2 has a year-by-year table of your work earnings for any job subject to Social Security and Medicare taxes, as well as how much you paid in those taxes. It also contains short descriptions of benefit calculations and notes on eligibility.
To access your statement, visit ssa.gov and sign up for a “my Social Security” account.
Once you have an account, you can view, save, and print an up-to-date version of your statement at any time.
Click here to view a short video (1:56) describing the format of the new Social Security statement.
Deciding When to Claim Benefits
Your Social Security benefits are calculated using complex actuarial equations based on life expectancy and estimated rates of return. They are not designed to encourage early or late retirement. If you live as long as anticipated, the total amount you receive over your lifetime should be about the same whether you claim it at age 62, age 70, or sometime in between. You will either receive the money as a smaller monthly payment over a longer period of time or a larger monthly payment over a shorter period of time.
The best time for you to claim your benefits depends on your personal situation and health. If you expect to live longer than average, your overall lifetime benefit will be greater if you delay claiming your benefits to increase your benefit amount. If the opposite is true and you see little chance of making it into your mid-80s, you would likely receive a greater lifetime benefit by taking it sooner, even though it would be a smaller monthly payment.
Once you decide when you want to start receiving benefits, remember to complete your application three months before the month in which you want your retirement benefits to begin.
How Can Married Couples Maximize Benefits?
Because married people have the ability to receive their own benefit or a spousal benefit, they have more to consider when filing for benefits. With the right strategy, married couples can maximize their benefits.
In the majority of cases, the lower-earning spouse may want to begin collecting benefits early while the higher-earning spouse waits as long as possible. That way, you can access the lesser benefit while maximizing the higher benefit.
Often, it is the husband with the higher benefit and the wife with the lower one. Women also tend to live longer than men. By following this strategy of waiting as long as possible to claim the higher benefit, you not only maximize the husband’s retirement benefit for use while he is alive, but it also maximizes the wife’s survivor benefit when he passes away.
While it used to be a popular claiming strategy, the Restricted Application is now only available to those born before January 2, 1954. By restricting your application, you can receive a spousal benefit if your spouse is already collecting benefits while allowing your own benefit to continue to grow until age 70. That way, you can begin to receive spousal benefits while maximizing your own benefit.
How Does Working Affect Benefits?
Working does not affect your benefits once you reach FRA, but it does before that. Only earned income, such as wages and self-employment earnings, affects your Social Security benefits. Income from investments, pensions, and annuities do not affect Social Security benefits.
When you are under FRA for the whole year, your Social Security benefit is reduced by $1 for every $2 you earn over $21,240. In the year that you reach FRA, your benefit is reduced by $1 for every $3 you earn over $56,520. Once you reach FRA, your benefit is no longer reduced no matter how much you earn. These dollar amounts adjust each year, so your benefit may change in following years.
Changes for 2023
In 2022 the COLA is 8.7%, which is the biggest increase in 40 years. Individuals can expect benefits to rise by an average of $140 per month. Other changes are happening in January 2023 based on the increase in the national average wage index. For example, the maximum amount of earnings subject to Social Security payroll tax in 2023 will be higher. The retirement earnings test exempt amount will also change in 2023.
How Does Social Security Fit Within Your Financial Plan?
When we request documents to complete your financial plan, we will request a recent copy of your Social Security statement for you and/or your spouse. Once we receive your Social Security statements, we will then input data needed into our Social Security analysis software to present several different scenarios to determine when it may be best to start Social Security based on your specific situation. Our reports will provide you an easy-to-read analysis such as:
Work With an Experienced Professional
Depending on how much you have in savings, when and how you claim your Social Security benefits could very well be the most important retirement decision you make. Because of the significance and complexity of this decision, it’s a good idea to consult with a fiduciary financial adviser before beginning the process.
Adam Wright is a CERTIFIED FINANCIAL PLANNER™ professional at Wright Associates, helping clients plan and prepare their investments to retire on their terms. If you’re serious about planning for your retirement and investing for your future, his annual process will help you make the right money choices today. Therefore, Adam and his team will proactively manage your accounts while communicating the progress of your financial plans. He believes the retirement advice you receive should be intentional and actionable.
Adam has a Bachelor of Science in Supply Chain and Information Systems from The Pennsylvania State University and a Master of Business Administration from University of Pittsburgh, Katz Graduate School of Business. He lives in Upper St. Clair with his wife and two children. When he’s not working, Adam enjoys the outdoors (fly fishing), reading, and taking long runs while listening to a favorite podcast. He’s also currently encouraging himself to take up golf. To learn more about Adam, connect with him on LinkedIn.