Social Security is a crucial part of retirement planning for many Americans. It’s a program designed to provide financial support during retirement, but the amount you receive can vary greatly depending on several factors. Understanding how Social Security works and making strategic decisions can help you maximize your benefits and secure a more comfortable retirement. In this blog, we’ll cover simple yet effective ways to get the most out of your Social Security benefits.
1. Understand How Benefits Are Calculated
Your Social Security benefits are calculated based on your lifetime earnings. The Social Security Administration (SSA) looks at your highest 35 years of earnings to determine your average indexed monthly earnings (AIME). This amount is then used to calculate your primary insurance amount (PIA), which is the monthly benefit you’ll receive at your full retirement age (FRA).
If you have fewer than 35 years of earnings, zeros are added for the missing years, which can significantly reduce your benefit. Therefore, working for at least 35 years can help ensure that your benefit is based on a full earning history.
2. Delay Claiming Your Benefits
One of the most effective ways to increase your Social Security benefits is to delay claiming them. You can start receiving benefits as early as age 62, but your monthly benefit will be reduced by about 6% to 7% for each year you claim before your full retirement age, which is typically between 66 and 67, depending on when you were born.
On the other hand, if you delay claiming benefits past your full retirement age, your benefit will increase by about 8% for each year you delay, up until age 70. This means that if your full retirement age is 66 and you wait until 70 to start collecting, your benefit could be 32% higher than if you had started at 66.
3. Work as Long as Possible
As mentioned earlier, Social Security benefits are based on your highest 35 years of earnings. If you’re still working and your current salary is higher than some of your earlier years of earnings, continuing to work can replace those lower-earning years with higher-earning ones, which can boost your benefit.
Even if you’re past your full retirement age, working and earning more can still increase your benefits, especially if you didn’t have a full 35 years of earnings or if your income has significantly increased in recent years.
4. Coordinate With Your Spouse
If you’re married, there are several strategies you can use to maximize your combined Social Security benefits. Here are a few to consider:
- Spousal Benefits: If your spouse has a significantly higher earnings record than you, you may be eligible to receive spousal benefits. This can be up to 50% of your spouse’s benefit if you claim at your full retirement age. If you qualify for your own benefits but they’re lower than your spousal benefits, you’ll receive your own benefit first, and then Social Security will top it up to the spousal amount.
- Claim and Suspend: This strategy allows the higher-earning spouse to file for Social Security benefits at full retirement age and then immediately suspend them. This allows the lower-earning spouse to claim spousal benefits while the higher-earning spouse’s benefit continues to grow until they decide to start receiving it, ideally at age 70.
- Survivor Benefits: If your spouse passes away, you may be eligible for survivor benefits, which can be up to 100% of your spouse’s benefit. Coordinating when you and your spouse claim benefits can help maximize the survivor benefit if one of you passes away.
5. Consider the Impact of Taxes
Social Security benefits can be subject to federal income tax, depending on your income level. If your combined income (which includes your adjusted gross income, nontaxable interest, and half of your Social Security benefits) is above a certain threshold, up to 85% of your Social Security benefits could be taxable.
To minimize taxes on your Social Security benefits, you may want to consider strategies such as:
- Roth Conversions: Converting some of your traditional IRA or 401(k) funds to a Roth IRA before you start receiving Social Security benefits can reduce your taxable income in retirement. Roth IRA withdrawals are tax-free, so they won’t increase your combined income and trigger taxes on your Social Security benefits.
- Timing of Withdrawals: If you have savings in traditional retirement accounts, you might consider withdrawing from them in the years before you start receiving Social Security benefits to keep your income lower in the years when you do start receiving benefits.
6. Be Mindful of the Earnings Test
If you claim Social Security benefits before your full retirement age and continue to work, your benefits may be temporarily reduced based on how much you earn. For 2024, if you’re under full retirement age for the entire year, Social Security will deduct $1 from your benefits for every $2 you earn above $21,240.
Once you reach your full retirement age, the earnings test no longer applies, and your benefits will be recalculated to give you credit for the months in which your benefits were reduced due to your earnings. However, if you plan to work and claim benefits early, it’s important to consider how the earnings test could affect your income.
7. Review Your Earnings Record
It’s important to regularly review your Social Security earnings record to ensure that it’s accurate. Your benefits are based on your earnings history, so any errors could result in a lower benefit. You can check your earnings record by creating a “my Social Security” account on the SSA website. If you find any discrepancies, contact the SSA to correct them as soon as possible.
8. Consider Health and Longevity
When deciding when to claim Social Security benefits, consider your health and family history. If you expect to live a long life, delaying benefits to maximize your monthly payment may make sense. On the other hand, if you have health issues or a shorter life expectancy, it might be better to claim benefits earlier.
9. Don’t Rely Solely on Social Security
While Social Security is an important part of retirement income, it’s not designed to cover all of your expenses. The average Social Security benefit in 2023 is about $1,827 per month, which is unlikely to be enough to maintain your pre-retirement lifestyle. It’s important to have other sources of income, such as savings, investments, or a pension, to supplement your Social Security benefits.
Conclusion
Maximizing your Social Security benefits requires careful planning and an understanding of how the system works. By working for at least 35 years, delaying your benefits, coordinating with your spouse, and considering tax implications, you can increase the amount you receive and enjoy a more secure retirement. Remember, Social Security is just one piece of the retirement puzzle, so it’s important to have a comprehensive retirement plan in place. Start planning early, review your options regularly, and make informed decisions to get the most out of your Social Security benefits.
