Despite the fact that most Americans are entitled to Social Security, many don’t understand how it works—and thus fail to maximize this retirement benefit. To help avoid that scenario, here are answers to some of the most commonly asked questions.
1. Who’s eligible to receive Social Security benefits?
To qualify for Social Security, you or your spouse need to have paid the Social Security payroll tax for at least 10 years (though those years needn’t be consecutive). A nonworking spouse is potentially entitled up to half of a spouse’s benefit.
2. How are benefits calculated?
There are two formulas at work behind the scenes. One that is based on your 35 highest-earning years indexed for inflation and another that transforms that calculation into the monthly benefit estimates we understand — bottom line, the more you earn over your lifetime, the more you can expect to receive from Social Security.
That said, there’s a limit to the amount of annual income that qualifies for the Social Security calculation. (In 2021, it’s $142,800.) However, if you earn more than the annual maximum in a given year as an employee, the income above that threshold will not be subject to the 6.2% Social Security payroll tax (for the self-employed the rate is 12.4%).
3. How can I increase my benefit?
Although there’s nothing you can do to revise your earnings history, there are other steps you can take to boost your Social Security payouts.
- Work longer: If you don’t yet have 35 years of income history, every additional year you work replaces a zero-income year. And if you’re currently earning your peak income, every additional year you work could replace a year in which your earnings were lower.
- Wait to collect: Although you can start collecting a reduced benefit as early as 62, waiting to collect will boost your monthly check. Indeed, for every year you delay past your full retirement age—which is between 66 and 67, depending on your birth year—you’ll see a boost in your annual payout of about 8%. Thus, if you wait to collect until 70, after which there is no incremental benefit, you’ll receive from 24% to 32% more than if you had begun collecting at your full retirement age—and roughly 76% more than if you had begun collecting at 62.
Of course, it’s not always possible to work longer or wait to collect. Those in poor health or who need the income to make ends meet, for example, might decide to take Social Security as soon as possible.
4. What’s a good strategy for spouses?
A lot of couples want to start collecting both spouses’ Social Security right away, but doing so may not be the best choice if one of you earned significantly more than the other over the course of your working careers. Although there’s no magic bullet, it often makes sense for the higher earning spouse to wait as long as possible, up to age 70. Depending on health and finances, the lower-earning spouse can collect benefits earlier.
This is especially beneficial from an estate-planning perspective. That’s because after the death of one spouse—regardless of whether it was the lower- or higher-earning one—the surviving spouse receives the larger of the two benefits for the remainder of his or her lifetime.
“I often suggest that clients think through a worst-case scenario in which one of the two checks goes away,” says Nancy Cresswell, an associate financial planner at Schwab Private Client Investment Advisory. “How much of a difference might it make for the surviving spouse, having maximized the benefit?”
There are other strategies to consider, of course. If you need help, it’s best to consult a qualified financial planner or National Social Security Advisor before filing for benefits.
5. Can my kids inherit my Social Security benefit?
It’s not just a spouse who can benefit from the Social Security you’ve earned. Dependent children and even grandchildren may also be eligible if they are under 18 when the Social Security recipient dies, becomes disabled, or retires. And disabled children of any age may qualify if they were disabled before the age of 22. That said, “the rules are complicated, especially around disability,” cautions Rob Williams, CFP® and vice president of financial planning and retirement income at the Schwab Center for Financial Research. As a result, Rob recommends consulting the appropriate benefit specialists at the Social Security Administration (SSA).
6. Is Social Security going to run out of money?
According to the SSA, the surplus in the two Social Security trust funds—the Old-Age and Survivors Insurance Trust Fund, which pays retirement and survivors benefits, and the Disability Insurance Trust Fund, which pays disability benefits—will be exhausted between 2033 and 2035, all things being equal.
However, “exhausted” is a relative term. The SSA says some benefits could be paid even if the trust funds are depleted. In fact, the trust funds’ annual income is projected to equal about 79% of the program’s cost even if the reserves were fully depleted.
“What I tell clients is, ‘It will be there for you—but there may be some changes,’” says Rob. That could mean later retirement dates for future recipients, reduced benefits for retirees who can afford it, or increases to the Social Security payroll tax in order to raise more money.
“Lawmakers may well do something in each of those three categories,” says Nancy, “though it’s unlikely that benefits would go away entirely.” Of course, if you’re worried about potential changes, there’s one sensible way to try to hedge against that risk: save more.
“Today, there’s a greater individual burden than ever before to save for retirement,” says Nancy, who notes that clients request consultations on Social Security more than any other topic. “It’s important to fully understand your Social Security benefit, but also important to understand that it was never intended to be your sole source of retirement income.”