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Are you counting on Social Security to provide a reliable stream of income in retirement? You’re not alone! For many retirees, those monthly Social Security checks are an essential part of covering basic living expenses.
The good news is that with some strategic planning, you can potentially increase the amount you receive from Social Security. This can go a long way in making retirement more comfortable and secure.
We’re about to explore a few things that may help you maximize your Social Security benefits. With smart planning, you may be able to receive higher payments and get the most out of this important retirement income source.
Key Takeaways
- Your Social Security benefit is calculated based on your lifetime earnings history. Higher earning years and more years worked increase your payout.
- Boost your benefits by optimizing earnings in the years leading up to retirement. Aim to earn the annual maximum taxable amount.
- Carefully consider when between age 62 and 70 to start claiming benefits. Delaying until age 70 results in the highest monthly amount.
- Coordinate claiming with your spouse and understand spousal/survivor benefit options.
- Manage taxes on your benefits by optimizing other retirement income sources. Up to 85% of benefits can be taxed.
- Use online calculators and talk to a financial advisor to develop a maximization strategy tailored to your situation.
Now let’s dive into the key factors that determine your benefits and strategies to optimize your Social Security income.
Understand the Social Security Benefits Formula
The first step is understanding how the Social Security Administration (SSA) calculates your primary insurance amount (PIA), which is your full monthly retirement benefit available at full retirement age.
This calculation is based on your average indexed monthly earnings (AIME) over your 35 highest earning years. Simply put, your benefits go up the more you earn and the longer you work.
Higher lifetime earnings result in a higher PIA, ensuring you receive credit for your contributions to Social Security taxes over your working career.
For example, if you earned the inflation-adjusted equivalent of $50,000 annually over 35 years, you would have a higher AIME than someone who earned $30,000 over the same time period. This results in you getting a bigger monthly benefit check.
That’s why it’s important to maximize earnings as much as possible during your prime earning years.
Your annual earnings that surpass the Social Security wage base (maximum taxable amount) are not counted in the calculation since no additional taxes are paid. For 2023, the wage base is $160,200, though it generally rises each year with inflation.
Additionally, for each year you don’t work, a zero income is factored into the calculation, bringing down your average. Just five years with zero earnings could reduce your monthly benefit by hundreds of dollars.
The lesson here is to ensure you consistently earn an income over at least 35 years to avoid zeros dragging down your benefits. If you took time out of the workforce for caregiving or other reasons, aim to fill in those zero years.
Optimize Your Earnings History
Now that you understand how the SSA formula works, here are some key strategies to optimize your lifetime earnings history and maximize your Social Security checks:
Work for At Least 35 Years to Avoid Zero Income Years
It’s worth repeating: each year with zero reported earnings brings down your average and results in lower benefits. Make it a priority to accrue at least 35 years of earnings to avoid those zeros.
Consider remaining in the workforce longer than originally planned or consulting part-time in retirement to replace zero income years. Even a modest income beyond 35 years can boost your bottom line.
Earn As Much As You Can, Especially Near Retirement Age
Your primary insurance amount is based on your highest 35 earning years, so increasing your income leading up to retirement can pay off.
Look for opportunities to boost your earnings in the final decade or so before claiming Social Security. Changing jobs, asking for raises, taking on freelance work, and maximizing bonuses, commissions, and overtime can all help grow your AIME.
Be sure any extra income you earn is accurately reported to the SSA on your W-2 forms. This ensures it’s counted towards your benefits calculation.
Be Aware of the Annual Earnings Cap for Social Security Taxes
Remember, only earnings up to the annual maximum taxable wage base—$160,200 in 2023—are counted in determining your future monthly payouts.
So once you surpass the wage base for top earners, your Social Security taxes stop increasing but your future benefits do not grow.
While the wage base tends to increase slightly each year with inflation, it remains fixed once you begin drawing benefits. This is why it pays to max out earnings while still working to lock in higher payments.
Pick the Optimal Claiming Age
One of the most impactful factors in how much you receive from Social Security is when you start claiming benefits. You generally become eligible to claim retirement benefits between age 62 and 70.
But just because you can start taking benefits early doesn’t mean you should. Claiming before your full retirement age (FRA) permanently reduces your primary insurance amount.
Your FRA depends on your birth year, ranging from 66 to 67 years old for most retirees today. This is when you become entitled to 100% of the benefit you’ve earned.
Alternatively, you can increase your monthly benefit by delaying when you start payments beyond your FRA. For each year you delay claiming up to age 70, your benefit grows by about 8%, permanently.
Let’s look at how your decision on when to take benefits impacts your monthly income:
- Claim at age 62: 75% of PIA
- Claim at FRA (age 66): 100% of PIA
- Claim at age 70: 132% of PIA
The right claiming age depends on your life expectancy and financial needs in retirement. While there is no one-size-fits-all answer, here are key considerations:
Delay Claiming Until Age 70 to Earn Delayed Retirement Credits
For each year beyond your FRA that you postpone claiming, your benefit increases 8% annually through delayed retirement credits. Waiting until age 70 to take benefits results in the highest monthly payment.
If you expect to live into your 80s or beyond, the bump in monthly income from delaying often outweighs the missed payments. Talk to a financial planner about your break-even analysis.
How Continuing to Work Affects Your Benefits
If you claim benefits before your FRA while still working, your benefits may be temporarily reduced based on earnings limits until you reach FRA.
Once you hit FRA, you can earn as much as you want from work without reductions to your Social Security income.
When It Pays to Wait – Break-Even Analysis
Crunch the numbers with your advisor to see your breakeven age compared to if you took benefits earlier. If you will surpass the breakeven age, delaying until age 70 likely maximizes your lifetime benefits.
Coordinate Claiming with Your Spouse
Married couples need to carefully coordinate when and how to claim Social Security to maximize household benefits. This gets more complicated but offers opportunities to boost income.
Some key strategies related to spousal and survivor benefits include:
How Spousal and Survivor Benefits Work
Spouses may be eligible for up to 50% of the primary worker’s PIA if that amount exceeds their earned benefit. Survivors can also claim their deceased spouse’s higher benefit.
- Spousal benefit available starting at age 62
- Reduced if taken before FRA
- Survivor’s benefit available at age 60
Strategies for Coordinating Spousal Claiming Timelines
The higher earning spouse can delay claiming to age 70 while the lower earning spouse claims a spousal benefit earlier. This maximizes the survivor’s benefit later.
Divorced spouses married over 10 years also qualify for spousal/survivor benefits. Make sure to understand and properly apply for all benefits available.
Rules Around Divorce and Remarriage When Claiming Benefits
Remarrying prior to age 60 generally disqualifies widows from survivor benefits on the ex-spouse’s record.
Divorcees can still claim spousal/survivor benefits if the marriage lasted over 10 years and they remain unmarried.
Considerations around divorce and remarriage come into play when coordinating Social Security strategies for households.
Manage Taxes on Your Benefits
One mistake that could take a big bite out of your Social Security income is improperly managing taxes owed on your benefits. Here are some tips to optimize your situation:
Up to 85% of Your Benefits May Be Taxable
If your gross income, including non-taxable sources, exceeds certain thresholds, up to 85% of your Social Security can be taxed at your ordinary income rate.
For 2022, the thresholds are $25,000 individual filers or $32,000 joint. At higher incomes, benefits become 85% taxable.
Ways to Optimize Other Income Sources to Avoid Taxes
Strategically withdraw from tax-deferred accounts like 401(k)s and traditional IRAs to keep your gross income below the 50%/85% tax thresholds.
Drawing more heavily from Roth accounts and taxable brokerage in early retirement may allow your Social Security benefits to escape taxation.
Use Resources to Maximize Your Personal Situation
While this guide covers key strategies that apply broadly, you also need to consider your unique situation, including:
- Income needs
- Spousal benefits
- Life expectancy
- Other retirement assets
- And more
Leverage the following resources to develop a custom-tailored plan:
Review Your Earnings Statement Annually
Your annual statement from the SSA contains your complete earnings history and estimated benefits. Review it to ensure your record is complete and accurate.
Social Security Calculators
Use free online calculators to estimate your benefits based on different claiming ages and model scenarios. See how delaying until age 70 impacts your monthly checks.
Talk to a Financial Advisor
There are complex rules and claiming strategies involving spousal coordination, divorce, taxes, and more. Speaking with an advisor can help ensure you fully optimize your benefits.
Start Planning Today to Maximize Your Social Security Benefits
The decisions you make about when to claim Social Security will have a big impact on your retirement finances. Take time now while you have flexibility to map out a smart claiming strategy.
The few extra years invested in planning and potentially working longer to increase your benefits can result in higher Social Security income for life.
Consider your life expectancy, health, spouse, taxes, and other income sources as you weigh when to claim benefits. Patience and planning pays off when it comes to getting the biggest monthly checks.
While Social Security will only replace about 40% of your pre-retirement income, maximizing your benefits can lead to tens of thousands more over your lifetime. That money can help fund the retirement lifestyle you want to enjoy.
Don’t leave money on the table or miss out due to lack of knowledge. Read up on the rules and strategies outlined above. And don’t be afraid to ask for help.
Speaking with a financial advisor who understands Social Security can provide immense value. An hour of their time reviewing your situation could result in increased checks of $100 or more per month.
Hopefully this guide gave you ample ideas on how to boost your Social Security benefits through smart planning. The small efforts you take today will pay dividends in your later retirement years.
Frequently Asked Questions
Below are answers to some common questions people have about maximizing their Social Security benefits:
How much can I expect to receive from Social Security?
The average monthly retirement benefit as of January 2023 is $1,827. Your exact benefit depends on your lifetime earnings history and when you claim benefits. Generally, Social Security will replace about 40% of pre-retirement income.
What is the maximum monthly Social Security benefit available?
For someone that retired in 2023 at full retirement age, the maximum benefit is $3,627 per month. If you delay claiming until age 70, the maximum benefit increases to $4,555 per month.
Do 401(k) withdrawals or other income affect my Social Security benefits?
Yes, if your gross income exceeds certain thresholds, up to 85% of your Social Security can become taxable income. Withdrawals from 401(k)s, IRAs, and other income are included in determining if your benefits are taxed.
Can I change my mind after applying for Social Security?
Yes, within 12 months you can withdraw your application and repay benefits received. This allows you to claim later and increase your monthly amount.
How do I check my earnings history with the Social Security Administration?
You can view your lifetime earnings record and estimated benefits by creating a “My Social Security” account on the SSA website. Review it annually for accuracy.
What happens to my Social Security benefits if I continue working?
If you claim benefits before your full retirement age while working, your benefit may be temporarily reduced until you reach full retirement age. Once at full retirement age, extra earnings do not impact your Social Security income.
What is the Social Security spousal benefit?
A spouse can receive up to 50% of the primary worker’s benefit. The spousal benefit is reduced if claimed before full retirement age. Spouses need to strategically coordinate when to take benefits.
How can a financial advisor help with Social Security planning?
An advisor helps analyze when to claim benefits based on your life expectancy, marital status, taxes, and other income sources. They provide a personalized strategy to help maximize your lifetime benefits.
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