Many people don’t give enough thought to when they should claim their Social Security benefits — even though they’re a key source of retirement income for most people. In fact, over 90% of Americans aren’t even sure how to maximize their benefits even if they want to.
You don’t want to end up claiming your benefits without understanding the full implications of your choice, so you shouldn’t be one of them. To make sure you’re making the best, most informed decision about your Social Security checks, don’t even think about filing for benefits until you have the answers to these three key questions.
1. How is your Social Security benefit determined?
A number of factors affect the size of your Social Security checks. Specifically, some of the key things that matter include:
- Your average wages in the 35 years you earned the most money (after wages throughout your career are adjusted for inflation)
- Your age at the time you file for benefits
Social Security calculates something called your Average Indexed Monthly Earnings (AIME) based on an average of your 35 highest-earning years. Your primary insurance amount (PIA), or standard benefit, equals a specific percentage of AIME. You only get your PIA if you retire right at full retirement age, though — which is between 66 and 67. If you retire before full retirement age, your PIA is either reduced by early filing penalties or increased by delayed retirement credits that you can earn until your 70th birthday.
Knowing how this calculation is done is important because it can shape your decisions. If you haven’t worked for 35 years, it may make a lot of sense not to retire and claim benefits yet, but instead to work for longer to avoid having $0s in your average. Or if you want to push out lower-earning years from the 35-year period used to determine AIME, you may decide to stay on the job a little longer if you’re earning a generous salary now. Likewise, if you were thinking of claiming benefits early but don’t want to be faced with early filing penalties, you may decide you need to wait.
2. Will your claiming decision hurt your spouse?
Claiming your benefits ahead of age 70 doesn’t just reduce the size of your checks during your lifetime. It also reduces any survivor benefits your spouse may be eligible for if you die first.
The death of a spouse is one of the biggest financial shocks retirees face, especially for seniors who rely heavily on Social Security. After all, if you were both getting checks and now only one of you is, that’s a huge loss of household income. It’s a loss that’ll be exacerbated if you were the high earner and you didn’t max out your Social Security checks.
If you took a 25% or 30% hit to your benefits, that means your surviving spouse will get checks that are 25% or 30% smaller than they could’ve been — and that could have a huge effect on their quality of life. The bottom line is, you have to think strategically about maximizing the benefits of the higher-earning spouse before you claim your benefits.
3. Will you owe taxes on your benefits?
Around 50% of retirees don’t get to keep the full amount of their Social Security benefits because the IRS takes a cut. As if that’s not bad enough, more than 36 million Americans are at risk of being double-taxed on benefits if they live in a state that also taxes them.
If you’re going to owe taxes, you need to know it before you claim benefits. That’s important both so you can make sure the income you have left after paying your tax bill is sufficient, and so you can tell the Social Security Administration to withhold taxes if you don’t want to be responsible for paying them yourself.
It’s not a lot of fun to think about losing some of your Social Security to taxes, and it’s even less enjoyable to try to figure out the Social Security formula or to consider how your spouse will survive without you. But the bottom line is, you need to know the answers to these three questions, as they could shape your financial future for yourself and those you love. Don’t even consider filing for benefits until you have the answers to all three.