How much social security benefit will I get when I retire? If you have ever mulled over this question, rest assured that you aren’t the only one. A lot more people are beginning to pay attention to social security benefits. After all, people are living longer than ever, and it makes sense to maximize your benefits. Furthermore, carefully planning your retirement and social security payments is a critical component in securing a lifetime of income adequacy.
Social Security is playing an increasing role in reducing poverty across the U.S. According to the Center on Budget and Policy Priorities, 22 million Americans would be impoverished without Social Security.
However, calculating social security retirement benefits can be a complex operation since there are a lot of factors to consider. Such as the age when you start taking benefits and your average lifetime earnings.
There is also a limit to how much you can receive Social Security benefits. Currently, the maximum social security benefit for each month at age 66 is $2,861. While you can’t earn more than this amount, some factors may make you earn less.
Let’s Look at Ways to Maximize Your Social Security Payments Despite These Factors.
Work For At Least 35 Years
To maximize your Social Security income, strive to work for at least 35 years. The Social Security Administration (SSA) calculates your final benefit payout based on what you earned in the 35 years you received the most. Say for example, you earned only for 30 years that means minus five in the formula which means your benefits will shrink. Therefore, strive to work for 35 years if you can. Also, ensure your working years are being correctly captured in the system.
Earn More at Work
Still, on the formula, another way you can increase your benefits is by earning as high a salary as you can. This is because the Social Security Administration’s formula focuses on your 35 top-earning years. So even if you have completed your mandatory 35 years, You may still be able to increase your benefits working and earning more than you did previously. Every additional year you worked with higher pay will remover the lowest-earning work-year from the equation, boosting your benefits.
Work Until Full Retirement Age
To get your full social security payments, you need to claim Social Security at your full retirement age. This is typically 66 or 67 for most workers. Your monthly payments will be permanently reduced if you sign up for Social Security before full retirement age.
According to the SSA, you must be at least 62 to retire and start receiving Social Security. And you will lose 30% of your benefits for that year. Then, for each year leading up to 66, the deducted amount is reduced based on your birth year.
Work Until 70
The longer you delay cashing in on your Social Security, the higher your gain. Talk about delayed gratification. Every year after full retirement, your entitlement increases by about 8%. However, once you clock 70, it’s time to cash out. This is because your payment is at its highest point and there are no additional increments after this age.
On the other hand, you should take into consideration your life expectancy before deciding to wait it out till you’re 70. If you pass away in your 70s, then all the wait would have been for nothing. Because it means that you would have received less benefits than if you had claimed it earlier. And not everyone can or would want to work till they are 70. You may as well go ahead and claim your benefits before 70 if you need it.
Watch What You Earn in Retirement
The SSA applies penalties if you earn above a certain limit in retirement. These limits and their effects on your earnings depends on how close you are to full retirement age.
In 2019, Social Security beneficiaries who are under full retirement age and who earn more than $17,640 will have $1 withheld for every $2 they earn above the limit. And when you reach your full retirement age, the earnings limit leaps to $46,920. And the penalty drops to $1 withheld for every $3 earned above this amount. Finally, at full retirement age, what you earn has no impact on your benefits.
Coordinate Spousal Benefits
If you are married, you can work together with your spouse to get the best out of your social security benefits. One of you can wait until age 70 to claim benefits, thereby increasing the survivor benefit. To get a better payout, the spouse with a richer work history should be the one to delay benefits. Similarly, if you or your spouse were born on or before January 1, 1954, and you have reached retirement ages, you can use a restricted application to collect spousal benefits (that is, if you haven’t yet claimed your benefits) while yours continues to grow. When you get to 70, you may then switch to your higher benefit amount. If you were born later than that, then this option doesn’t apply.
Coordinating your social security payment options as a couple is a sure-fire way of increasing your social security benefits.
Minimize Social Security Income Tax
Before the ’80s, Social Security retirement benefits used to be income-tax free. The federal government later introduce taxes and even increased it in the ’90 for higher-income beneficiaries.
For a married couple with combined income (sum of your adjusted gross income, nontaxable interest, and half of your Social Security benefits)) in the range of $32,000 and $44,000, 50% of the benefit is counted as gross income. For other taxpayers, 50% of their benefits are considered gross income if their combined income is between $25,000 and $34,000. For married couples whose income exceeds $44,000 and for other taxpayers whose income exceeds $34,000, a whopping 85% of benefits are included as gross income.
To calculate the amount of benefit taxed, you take adjusted gross income from the tax returns and add some tax benefits such as tax-exempt interest income.
Therefore, to get the best out of your social security income, you should try minimizing taxes on your benefits by reducing the modified adjusted gross income. Some key ways include converting traditional IRAs to Roth IRAs, minimizing distributions from traditional IRAs, evenly distributing your funds over a few years, so there are no sudden increases or decreases and carefully timing sales of assets with capital gains.
Social Security is a critical part of a retirement plan. But far too few people pay attention to their options when claiming benefits. This could possibly mean they collect less than what they can, leaving lots of money on the table.
With these 7 tips, you will be able to get the most out of your retirement benefits. But first, you have to ensure that your income and employment is being accurately captured by the SSA. The SSA encouraged any worker above 18 years to create an account with them so they can monitor their Social Security Statement.
You can seek the services of a qualified financial planner if you need help with planning your social security.