How to Maximize Your Social Security Benefits

For an increasing number of retirees, their Social Security benefits are expected to play a more significant role in creating lifetime income sufficiency. It is more important than ever to understand your benefit options and the steps you can take now to ensure you receive the maximum benefit for your years of hard work.

With some foresight and proper planning, it’s possible to add thousands or even tens of thousands of dollars to your lifetime benefits.

Maximize Your High Earning Work Years

Your Social Security Benefits are calculated based on your highest earnings from 35 years of work history. Your earnings from your highest 35 years are averaged out to arrive at your maximum benefit. If your top 35 years included any low-earning years, they would bring down your average. Any years you were unemployed are counted as zeroes, which will lower your average. However, each additional year of earnings you work past 35 years will replace an earlier year of lower or zero earnings and increase your average.

Keep the Pedal to the Medal on Earnings through Full Retirement Age

Many pre-retirees make the mistake of scaling back on their work or even semi-retire before they reach full retirement age. This could cost them thousands of dollars in lifetime benefits. Your benefit amount is based on your earnings so, the more you earn, the more you will receive in benefits. The annual earnings cap is $147,000 in 2022 (indexed for inflation), above which your earnings are not included in the calculation. You should strive to earn as much as you can as you approach retirement, even if it means taking on part-time work.

Delay Your Benefits until Age 70

You receive full Social Security benefits when you retire at your full retirement age (FRA), which, for most people retiring today, is 66 (FRA gradually increases to 67 for people born in 1960 and later). However, each year you delay your benefits, you earn Delayed Retirement Credits (DRC) which increases your benefit amount by 8 percent until age 70. For a monthly benefit amount of $2,000 at FRA, your monthly benefit amount would increase to $2,640, and your lifetime benefit amount would increase from $378,000 to $411,000, not including Cost of Living Adjustments.

Take Early Spousal Benefits

When both spouses are at least 62 years old, one can start taking the spousal benefit while the other delays benefits until FRA or later. The spousal benefit amount is half the full benefit amount of the other spouse, so this option is best suited in cases where the other spouse is the higher-earning spouse. Once the spouse taking spousal benefits reaches FRA, they can convert to full retirement benefits. This requires that the spouses be married for a minimum of 10 years at the time of selecting the option.

Watch Out for the Social Security Tax Trap

If you plan on earning an income after you begin receiving your benefits, you may have to pay taxes on 50 to 85 percent of your Social Security benefits. If your total income is between $34,000 and $44,000 ($25,000 and $34,000 for single filers), including earnings and investment income (and income from tax-exempt securities), up to 50 percent of your benefit payments are taxed. When your total income exceeds $44,000 ($32,000 for single filers), up to 85 percent of your benefit payments are taxed. You can reduce the taxation of your benefits by controlling how much income you earn in any particular year or by transferring a portion of your interest-bearing savings to an annuity. The interest earned inside an annuity is tax-deferred, and the income paid from an annuity is not included as part of the Social Security tax.

Source: Social Security Administration https://www.ssa.gov/benefits/