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When Social Security was introduced in 1935, it was never intended to be a primary income source that could support people in retirement. Rather, its sole purpose was to provide a safety net for people who were unable to accumulate sufficient retirement savings. For the next several decades, the majority of Americans never gave much thought to their Social Security because of shorter lifespans and a reliance on guaranteed pensions.

Things are very different today. Social Security planning is now a vital element in securing income sufficiency in retirement and there are strategies to maximize your benefits.

Key Takeaways

  • Navigating Social Security income can be complicated, but there are strategies to maximize your Social Security benefits.
  • Working for 35 years or more will help ensure you get the most money when your benefit amount is calculated.
  • Earn as much as you can right up until full retirement age (or past it) to max out your benefit.
  • If you wait until age 70 to claim, you can increase your benefit by 8% a year beyond your full retirement age.
  • Be aware that 50% to 85% of your benefits may be subject to federal taxes if you’re at a certain income level after you begin receiving Social Security.

Think of Social Security as an Annuity

“Given today’s longevity, it is more important than ever to maximize your Social Security benefit. Think of this as an annuity for your lifetime,” says Charlotte A. Dougherty, CFP®, founder of Dougherty & Associates, Cincinnati, Ohio.

“Social Security is the only 8% guaranteed investment around. Not only that, it is backed by the federal government,” says David Hunter, CFP®, Horizons Wealth Management, Inc., Asheville, N.C.

Although there are many planning options for maximizing Social Security benefits, they can be complex and only apply in certain circumstances. The following five planning tips are ones that everyone should know about in order to increase the size of their Social Security checks.

1. Work at Least the Full 35 Years

The Social Security Administration (SSA) calculates your benefit amount based on your lifetime earnings. The SSA adjusts your earnings, indexing them in order to take into account changes in average wages since the years you received those earnings. Then the SSA totals your earnings from your 35 highest-earning years and uses an average indexed monthly earnings (AIME) formula to come up with the benefit you will receive at your full retirement age.

If you entered the workforce late or had periods of unemployment, those years will count as zeroes, which will be included in the formula, bringing down the average. Once you have worked 35 years, each additional year of earnings will replace an earlier year of lower earnings, which will increase the average—and hence, your benefit.

2. Max out Earnings Through Full Retirement Age

The SSA calculates your benefit amount based on your earnings, so the more you earn, the higher your benefit amount will be. Some pre-retirees look for ways to increase their income, such as taking on part-time work or generating business income. Others, however, unaware of the impact on benefits, may scale back on their work or semi-retire, which can lower their Social Security income.

“Money earned after age 60 isn’t indexed, which means that income-earning in your 60s can replace a year in which there was a zero or a year in which you had lower earnings,” says Marguerita Cheng, CFP®, CRPC®, RICP, CDFA, CEO of Blue Ocean Global Wealth, Gaithersburg, Md.

Earnings above the annual cap—$142,800 in 2021 ($147,000 in 2022) and indexed to inflation each year—are left out of the calculation. Your goal should be to maximize your peak earning years, striving to earn at or above the cap.

3. Delay Benefits

Most people know their full retirement age (FRA)—the age at which they can receive their full Social Security benefits. For most people retiring today, the FRA age is 66.

But very few people know that if they delay their Social Security benefits until after they reach FRA, they can effectively earn an 8% annual return on their available benefits. The benefit amount increases by 8% each year that it is delayed until age 70. That is based on the delayed retirement credits (DRCs) earned for each year Social Security benefits are delayed.

If, for example, you are eligible for a primary insurance amount (PIA) of $2,000, or $24,000, at age 66, then by waiting until age 70, your annual benefit would increase to $31,680. In cumulative terms, you would increase your total benefits from $378,000 received by your life expectancy at age 82 to $411,000.

This example doesn’t account for cost-of-living adjustments (COLAs). Assuming a 2.5% COLA, your delayed benefit would grow to $38,599 after four years, thanks to the benefits of compounding, and your total benefit amount would increase to $584,000 by age 82. Keep in mind that COLAs go up and down. For example, between 2009 and 2020, there were three years when the COLA was zero. The COLA for 2021 was 1.3% and for 2022, was 5.9%.

4. Claim Spousal Benefits and Delay Yours

If you and your spouse were born before Jan. 2, 1954, and have both reached full retirement age, you can claim spousal benefits and let your own benefits keep growing. Then, when you reach age 70, you can switch to your higher benefit.

One caution: You can’t have claimed your own benefit if you want to make use of this “restricted application,” as it’s called.

In order to claim a spousal benefit, your spouse must have filed for their own Social Security benefits (but ex-spouses are exempt from this rule).

5. Avoid Social Security Tax

If you are planning on supplementing your retirement income by working after you start receiving Social Security benefits, you need to be aware of the tax consequences of increasing your income. Anywhere from 50% to 85% of your benefit payment can be subject to federal taxes.

To determine how much of your benefits will be taxed, the IRS will add your nontaxable interest and half of your Social Security income to your adjusted gross income (AGI). If that total amounts to $25,000 to $34,000 for single filers—or $32,000 to $44,000 for joint filers—up to 50% of your Social Security income is subject to tax. When that amount exceeds $34,000 for a single filer or $44,000 for joint filers, up to 85% of your benefits are subject to taxes.

You may be able to avoid paying taxes on Social Security income by considering ways to spread out your income from various sources so as to prevent any increases that could trigger a higher tax.

“Many investors have a ‘tax honeymoon’ period between retirement and age 72. They have no earned income and are not required to withdraw from their IRAs yet. If they have a nonqualified account, they can withdraw tax-free principal. In this situation, it is quite possible that Social Security benefits will be tax-free,” says James B. Twining, CFP®, wealth manager, Financial Plan, Inc., Bellingham, Wash.

SECURE Act Retirement Account Changes

Changes were made to the rules regarding retirement accounts with the passage of the SECURE Act in 2019 by the U.S. Congress. A few of those changes include the following:

Eliminated the Stretch Provision

The SECURE Act removed the stretch provision, which previously allowed non-spousal beneficiaries to withdraw the required minimum distributions from an inherited IRA until the account was depleted. Non-spousal beneficiaries must withdraw all of the funds in 10 years following the death of the original account holder, a requirement put in place on Jan. 1, 2020.

Removed Age Limit for IRA Contributions

The SECURE Act removed the age limitation for IRA contributions, meaning that investors of any age can now add money to an IRA account.

Raised the Age for Required Minimum Distributions

The age for required minimum distributions was raised to age 72 from the previous 70½.

The Bottom Line

These steps will go a long way toward helping you get the most out of your Social Security benefit and provide more financial security during your retirement.

However, it’s important that investors review the changes to retirement accounts as a result of the SECURE Act. From there, you can determine how to plan your Social Security benefits and financial plan. Also, it’s a good idea to review any changes with a financial professional.