Other posts have explained Social Security basics, retirement benefits and spousal benefits. You can take steps listed below to maximize Social Security monthly benefits you will be entitled to based on your own work record. There are also steps you may be able to take to maximize your Social Security spousal benefits.
Maximize Social Security as an Individual
The average retiree draws about $1,294/month. The maximum Social Security amount payable to a 65 year-old retiree in 2014 was $2,431/month. If the 65 year-old defers receiving payments for four more years, the monthly payment goes up to $3,209. This is the absolute maximum available, although it increases slightly each year (due to an inflation adjustment) and it depends on what is considered to be your “full retirement age (FRA).” The FRA is currently in the process of going up from 65 to 67.
Tips to maximize Social Security based on your own work record
- Increase your lifetime average earnings for your best 35 years of work. If you do not have 35 years of paid earnings or if the earnings in some of the 35 years were very small, continuing to work to get 35 good years of earnings will boost your Social Security entitlement.
- If a) you worked abroad; b) the Social Security Administration (SSA) does not have a record of these earnings and c) these earnings would raise the inflation-adjusted average of your best 35 work years, talk with the SSA to see what can be done to include these foreign earnings in your work record.
- If you plan to live a long life (say 80+), postpone receiving Social Security until your full retirement age (FRA) or even better until 4 years after your FRA (about age 70). If possible, continue to work (even if part-time) and/or live on savings until then. Today’s long average life expectancies argue for taking Social Security as late as you can. Your monthly benefit amount grows by 6% to 8% annually between age 62 and about age 70, which a great rate of return in today’s interest rate environment. Also, the higher your monthly benefit amount, the more you will benefit each year you receive Social Security from the annual cost of living adjustments (COLAs), because they are a percentage increase on top of your monthly benefit amount.
- The most common mistake is applying for benefits before your FRA. The earliest you can start taking benefits is age 62. Taking benefits early will permanently reduce your monthly benefit. Also, if you take benefits early and are still working between age 62 and your FRA, your work earnings (if you earn more than about $15,000 per year) may reduce your Social Security benefits for those years.
- File with the Social Security Administration (SSA) at the time of your FRA but suspend receipt of your monthly Social Security payments for as long as you can – for up to 4 years after your FRA (about age 70). This not only allows the monthly amount of your entitlement to grow at 8% per year, it also creates a contingency fund because you can choose to unsuspend at any time up to 4 years after your FRA and make it retroactive back to the month of suspension. If you do so, the SSA will immediately pay you a lump sum equal to all your suspended monthly payments.
- If you are thinking of becoming a stay-at-home spouse who will focus on raising the children, realize that a) this may permanently seriously damage your own work record for Social Security retirement benefits (resulting in smaller monthly payments when you retire) and b) unless your marriage lasts 10 years or more, you will not be able in retirement to claim against your spouse’s work record. Consider whether there is a way to share stay-at-home parenting responsibilities.
You can determine the amount the SSA estimates you will get at different retirement ages at www.ssa.gov/myaccount. You will also find online calculators there to help with your retirement planning.
Income Tax on Social Security
When you start receiving Social Security benefits, part of them may be included in your taxable income. In general, lower-income retirees do not pay taxes on their benefits, while higher-income people do on a sliding scale. The formula for figuring out exactly how much is taxable is too complex to explain here. No more than 85% of your Social Security income is taxable.