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5 Tips To Help Maximize Social Security

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Most workers today aim to retire between the ages of 62 and 65–but will this be a good decision for you? If you are looking to retire within the next five years,  you should be aware that there are a number of critical decisions to make when claiming Social Security that can impact the amount of the benefits you’re entitled to.

Importantly, retiring before you reach your full retirement age –also known as “early retirement” –can result in a permanent haircut on your Social Security benefits, cripple your spouse’s survivor benefits, and subject up to 85% of your Social Security retirement benefits to taxation. As we mentioned in the past, for every $3 of income you make, over the income limitations, $1 of your Social Security retirement benefits will be reduced.

Taking all of this into account, it may seem like an easy decision to prolong claiming Social Security to get the most out of your benefits. But, there’s a little more to it than that. The good news is that there are a number of strategies to maximize Social Security benefits whether you’re married or single. So, let’s look into five considerations people should make to avoid these pitfalls and maximize their benefits.

1.  Delay Social Security Benefits

One of the more straightforward ways that you can avoid penalties and receive your full benefits is if you wait to claim them until you’ve reached your full retirement age. Even though you can technically begin to claim Social Security benefits at the age of 62, you won’t be able to receive full benefits until you reach your full retirement age.

While the specific date when you reach your full retirement age depends on the year you were born, for those born after 1960, the age is 67. So, claiming Social Security benefits when you reach this age will ensure that you won’t receive any penalties. However, there is a way to increase your benefits by prolonging this decision even longer. 

If you wait to claim benefits until you’re 70, your monthly benefit amount will increase even more. For example, benefits can increase by 8% for each year that you delay claiming Social Security. Plus, this higher amount will last throughout your retirement–not just in the short term.

Of course, this will not be the case for all people. If someone is suffering from health issues or absolutely needs the money to support them before they turn 70, they may claim benefits early. Even still, it is worth mentioning that retirees should assess their needs and choose the age to claim benefits that will maximize Social Security if possible.

2.  Work for at Least 35 Years

Another way that retirees can maximize Social Security benefits is by working at least 35 years. The reason this is important is that the Social Security Administration uses your 35 highest-earning years to calculate your Primary Insurance Amount (PIA). So, if you work less than 35 years, they will calculate in “zeroes” for those years that you weren’t paying into Social Security, which will decrease your benefit amount during retirement.

On the other hand, if you work more than 35 years, some of the higher-earning years after this time will be able to cancel out lower-earning years earlier on in your career. All in all, working at least 35 years should be the goal for most workers. Plus, working additional years could be beneficial if you’re earning more near the end of your career than you did at the beginning, which is true for many people.

3.  Collect Spousal Benefits

In any couple, it’s possible for one spouse to be entitled to less Social Security retirement benefits than the other. In some cases, one spouse is out of the workforce for a number of years, like when raising children or caretaking for a loved one. On the other hand, even if the spouse never took years off of work, they could have held lesser-earning positions throughout their career.

As one would assume, either case would reduce the Social Security benefits they could receive once they enter retirement. Going along with the rule of 35 years, working a lesser number of years or having lower-paying jobs means they paid into the system less, thus impacting the amount of benefits they are entitled to.

However, there are some options available so couples can maximize Social Security benefits once they retire. If couples find themselves in one of these situations, the spouse receiving lower benefits can claim spousal benefits to get up to 50% of what the principal earner receives. So, couples should consider if this option would bring in more monthly income for the household rather than each claiming their own benefits.

It should be noted that in certain situations, you can claim spousal benefits from an ex-spouse. So, if you were married for at least 10 years, you may be entitled to claim spousal Social Security benefits once you retire.

4.  Delay Social Security to Maximize Spousal Benefits

Keeping on the theme of spousal benefits, workers that retire early will also cause a permanent haircut on their spousal benefits, not just their own. This has major implications for the lifetime benefits for surviving spouses, as it will reduce these payments.

It’s very normal for at least one spouse to live well into their eighties or nineties. So, ensuring that you’ve timed your claims correctly and can support the surviving spouse in their later years should be a high priority. When making these decisions regarding spousal benefits and how to time your claims, it’s important to keep life expectancy and age differences in mind. This way, you can make the choice that will help support the surviving spouse to the end of their life.

Because of this, it’s recommended that the principal earner waits until they’re 70 to claim Social Security, as this will help them maximize Social Security benefits. At the very least, they should try to wait until they’ve reached their full retirement age to not cause any permanent haircuts to the monthly payments.

However, this is not the case for the lower-earning spouse, and it may even make sense for them to claim benefits before they reach full retirement age if it brings in additional income for the couple. Then, once the first spouse passes away, the surviving spouse will inherit the other’s benefits if they were of a greater amount, and the lesser benefit payments will cease.

5.  Avoid Having Benefits Taxed

Another factor that can detract from your Social Security benefits is taxation. Currently, over half of Social Security recipients owe income tax on their benefits, so it’s not uncommon. Plus, there are a dozen states that impose additional taxes on recipients who earn over a certain threshold. So, be aware that you may have to pay taxes on your Social Security income while in retirement, either at the local, state, or federal levels. 

How much you will owe in taxes on your Social Security payments will largely depend on the level of income you’re receiving while claiming benefits. If your yearly adjusted gross income is above $25,000 for individuals or $32,000 for married couples filing jointly, you could be subject to a federal tax on your Social Security benefits. But, if a retiree earns below these levels, their benefits will not be taxed.

Plus, how much your benefits will be taxed depends on how much your income exceeds these limits. For example, your benefits can be taxed up to 50% for income levels between $25,000-$34,000 for individuals, or $32,000-$44,000 for married couples filing jointly. Above these upper limits, your Social Security benefits can be taxed up to 85%, though this is the highest level of taxation anyone will face, no matter their income level.

So, if you are looking to maximize Social Security benefits, you should carefully consider all your income sources, and if they will subject you to additional tax liability. It’s not uncommon for retirees to find a part-time job to keep them active in their later years, but they should be aware of the additional taxation they could face if they earn above these limits while receiving Social Security benefits.

Bottom Line: Have a Strategy to Maximize Social Security Benefits

Above all, the amount of Social Security benefits you will receive is largely based on what age you claim them, and how much you earned throughout your career. While it isn’t always an option for people to prolong claiming benefits in order to maximize their monthly payouts, this should be at least a consideration for people who don’t need the money early.

In addition, those who are married should carefully time when they claim benefits with their spouse to maximize Social Security payouts for the household. Plus, if you are considering taking on a part-time job while in retirement, be aware that this could have major tax implications and subject you to a haircut in benefits if you exceed certain income thresholds set out by the Social Security Administration.

Social Security benefits are a major source of income for those who retire in the United States today, so it’s important to consider the factors listed here in order to maximize benefits and avoid making a mistake that could cost you throughout the duration of your retirement. If you want to learn more about how you can maximize Social Security benefits given your own unique circumstances, join our webinar later this month.

DISCLOSURES

Securities and advisory services offered through Independent Financial Group, LLC (IFG), a Registered Investment Adviser. Member FINRA/SIPC. Vaylark Financial Services and IFG are unaffiliated entities. Licensed to sell securities in the following states: CT Information provided is from sources believed to be reliable however, we cannot guarantee or represent that it is accurate or complete.

Opinions are those of the author and not necessarily those of Vaylark Financial Services or Independent Financial Group (IFG). IFG does not provide tax or legal services. Please discuss these matters with the appropriate professional.

Investing is subject to risk, including possible loss of principal. Determining which investments are appropriate for an individual investor will depend on your investment objectives, risk tolerance, and time horizon and should be discussed with your financial advisor before implementing any investment plan.

Tom Martin, WMCP®
Tom Martin, WMCP®
Tom Martin, is a financial advisor at Vaylark Financial Services, based in Hartford, Connecticut. He practices in the area of private wealth management offering comprehensive financial planning, custom investment portfolios, tax reduction strategies, risk management, estate and legacy planning, as well as advises on executive compensation and business owner profitability.

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