How knowing the Social Security rules is valuable

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Social Security is vital for many Americans.

A recent article suggested that Social Security is keeping nearly 15 million retirees out of poverty.1 Beyond that, millions more rely on the program to supplement their income and protect their quality of life during retirement.

No matter what role you expect Social Security to play in your retirement financial strategy, it’s important to have a good feel for how the program operates and to especially know some of its basic rules.

One thing you should know well is when you’re eligible and how your benefit changes from that moment through your Full Retirement Age and then through your maximum benefit amount. You are eligible to claim Social Security when you turn 62. However, that’s just the very first age that you’re eligible, and it’s not considered your Full Retirement Age (FRA). The FRA for most pre-retirees right now is currently between 66 and 67.1

If you file before your full FRA, your monthly benefit payment is going to be smaller. Here’s how they calculate that: For each of the first 36 months you claim your benefit before your FRA, your benefit is reduced by five-ninths of a percent.1 And, if you file more than 36 months before your FRA, your monthly payment is reduced an additional five-twelfths of one percent for each month over the initial 36 months.1

When you look at those numbers over the course of a year or even years, the percentages can add up in a hurry.

Another critical piece of the Social Security puzzle is that if you qualify for Social Security, your spouse of at least one year can base their claim on your earnings history. The amount your spouse receives will be either what your spouse earned from working or up to one-half of your benefit at your FRA, whichever is higher.1 Any spousal benefits don’t change the monthly amount that you receive.

Aside from your age, another thing to consider when determining when you’d like to start drawing your Social Security benefit is the number of years you’ve worked. Your benefit is based on your highest 35 years of salaries, and if you don’t work for 35 years, those missing years are calculated as zeros. If you’re in that situation, you can focus on filling in those zero years with working years. That may increase your averages and increase your monthly payment.

And, if you’ve put in 35 years of work, you can increase your average monthly payment by simply continuing to work, especially if you’re currently earning a higher salary relative to the rest of your career — because it will drop some of your lower earning years out of the formula and plug in your higher-earning years.

Even though there isn’t a magic recipe to significantly increase your monthly payment, you can educate yourself about how the benefits formula works so that you can use that knowledge to your advantage. When it comes to Social Security, knowledge can make a big difference in helping you reach your retirement goals. Working with a financial service professional can also help you understand and develop a strategy for income in retirement.