3 Ways to Raise Your Social Security Benefit

Wondering how to maximize your Social Security income? It’s not as difficult as you may believe. Here are three options almost anyone can do.

Not so long ago, baby boomers viewed Social Security as a retirement program for old folks. High-earning boomers felt that Social Security didn’t apply to them because the monthly checks were small and they believed the system wouldn’t be
around when they retired.

Now the tide has shifted. Nearly all boomers have embraced Social Security, and they’re on a mission to get the most out of the system. Maximizing Social Security has become a national obsession, even—especially—among high-earners.

A boomer who has earned the Social Security maximum throughout his career and who claims at full retirement age (67 for those born after 1959) will receive a monthly benefit of approximately $3,600. If he plays his cards right, he could receive even more.

One of the most frequently asked questions by boomers is: “How can I increase my Social Security benefit?” There are three ways to do it.

The easiest way to increase your Social Security benefit is to do nothing. In 1975 Congress authorized automatic cost-of-living adjustments (COLA) based on the annual increase in the CPI-W from the fourth quarter of one year through the third quarter of the following year.

The annual COLA is applied beginning with December benefits, which are payable in January. Most of the news reports that come out each year when the COLA is announced talk about the high cost of living and whether the COLA increase is enough for seniors on fixed incomes. What is not so well publicized is how the COLA can impact a person’s Social Security benefit over time. The higher the benefit is, the higher the COLA increase will be.

Let’s take someone with a primary insurance amount (PIA) of $3,000 per month and a full retirement age (FRA) of 67. If he claims his benefit at 62, he’ll receive a monthly benefit of $2,100 ($3,000 x .70). A 2% COLA applied to this amount would cause his monthly benefit to rise by $42. But if he claims his benefit at 70 and is receiving $3,720 per month ($3,000 x 1.24), a 2% COLA would cause his benefit to jump by $74.40, a difference of $32.40 per month. These may not seem like large amounts, but if you multiply them out and compound them over many years, they add up.

The second way to raise the Social Security benefit is by earning more. Many about-to-retire boomers ask how their benefit will be affected if they continue to work or, conversely, if they retire early.

Your PIA is based on an average of your highest 35 years of earnings. If you don’t have 35 years of earnings, your total earnings will still be divided by 35 years to come up with the average. Working longer will allow you to replace those years of zero earnings with positive earnings and bring up the average

If you already have 35 years of earnings, you can still improve your earnings record if you earn enough to cause an earlier, lower year of earnings to drop off.

Incidentally, if you keep working but at a lower salary— say you switch to part-time work—it will not cause your PIA to go down. Once the PIA has been calculated at age 62, higher earnings may cause it to go up, but low earnings will not cause it to go down. Note, however, that the benefit estimate shown on your statement assumes you will continue to work until claiming age. If you retire early, your benefit may turn out to be lower than you expect.

Most boomers are aware of the rules that provide for a reduced benefit if they apply at 62 and a higher benefit if they file at 70. Indeed, the amounts are shown right on the annual Social Security statement. But the difference between the age-62 amount and the age70 amount doesn’t seem very large at first glance, especially when the carrot of immediate free money is dangling in your face. But if you project those benefits out over a lifetime, incorporating annual COLAs, and even additional earnings—understanding that if the primary breadwinner in your family dies, his higher benefit will continue as long as the surviving spouse is alive—the difference between applying at 62 and applying at 70 expands enormously.

Let’s take the case of a high earner whose PIA is $3,000 and whose FRA is 67. If he were to take his benefit at 62, he would receive 70% of $3,000, or $2,100 per month. If he waits until full retirement age he’ll receive the full $3,000. And if he delays to age 70, the benefit will increase by 8% annual delayed credits between full retirement age and 70, giving him a benefit of 124% of $3,000, or $3,720. Adding up all the monthly benefits, by age 90, he will have received a total of $730,800 if he files at 62, or $937,440 if he files at 70. If he doesn’t make it to 90, his surviving spouse will continue to receive his benefit as her survivor benefit. These amounts do not include COLAs or additional earnings.

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Work With a Certified Professional

Rebekah J. Fero, CFP®, AIF®