For many retirees, Social Security benefits represent a material part of their income. Therefore, it makes sense to consider how your benefits can increase through steps taken both before and during retirement. Depending on your age and work history, listed below are five factors you can use to influence the size of your benefits.
Work at least 35 years.
The Social Security Administration (SSA) calculates benefits based on your lifetime earnings. Earnings are adjusted to index them for inflation, allowing for comparability from year to year. Your 35 highest earnings years are then totaled and they apply a formula to come up with the benefit you will receive.
If you have paid into Social Security for fewer than 35 years, the SSA will use the data available. If you have paid in more than 35 years, they will drop the lowest earnings years from the calculation. If you are able and willing, work longer to add higher-earning years into your benefit calculation. Earning more money from year to year will also help increase benefits. Download your social security statement from every year to be sure your earnings history, and the taxes you have paid, are being recorded correctly.
Your benefits are calculated based on what you can expect to receive at your Full Retirement Age (FRA). For most people retiring today, their FRA is 66. You can begin receiving reduced benefits as early as age 62 at a discounted level to reflect the fact you are expected to claim benefits for a greater number of years. Conversely, you can delay receiving benefits until age 70 and will get an 8% increase in exchange for each year you delay.
If you decided to begin receiving benefits early and then change your mind, the SSA offers a do-over that must occur within 12 months. It requires a filing and that you repay all the funds you have received interest-free. You will then restart your benefits at a new, higher rate based on your current age. You can also claim a credit for the taxes paid on benefits received already. This election is complex and uncommon, so seek guidance if the idea is something you wish to consider.
Avoid or minimize Social Security Tax
Or said another way, don’t earn too much in retirement. If Social Security payments represent only a portion of your income, you should be aware of any tax consequences. Depending on your adjusted gross income and its relation to your social security income, from 50% – 85% of your social security income could be subject to taxes. As Social Security becomes the primary source of income, it is less likely your benefits will be subject to taxes.
Consider your spouse
Some lower-earnings spouses could get more from taking a spousal benefit than from taking their retirement benefits, as much as 50% of what the higher earner will receive at their FRA. If either spouse starts early, they will receive the discounted amount, and the higher-earning spouse needs to be receiving benefits. When you apply, Social Security will compare your spousal benefit to your retirement benefit and give you the larger of the two.
Suspend your benefit
If you start Social Security early and decide that was a mistake, you can suspend your benefit once you reach your FRA. Benefits will automatically begin again the month you reach age 70. That will allow you to earn the delayed retirement credit, increasing your benefit by 8% each year you delay. However be aware of two things. One, anyone receiving benefits on your record will see theirs suspended as well. Two, you will need to make any Medicare payments separately.
If you want to learn more about how Social Security works, click here.