The adage “It’s not what you make, but what you keep” applies to your Social Security benefits in retirement as much as to your paycheck when you were working. How much of your Social Security benefit you actually put in your pocket depends on your income, when you start taking benefits and other factors.
The best way for many people to put more Social Security money in their pocket may be to delay benefits up to age 70. However, that may not be possible or even the best choice for everyone.
If that describes you, consider these 7 strategies to get more retirement income from Social Security.
1. Work more. According to the Social Security Administration, benefits are calculated “based on your average indexed monthly earnings during the 35 years in which you earned the most”. Typically, most people earn a lot less in the early years of their careers than they do in the final years.
Likewise, parents who take time off to raise children, people who experience long periods of unemployment and others who are out of the workforce for extended periods may experience a reduction in their benefits due to having several lower earning years factored into their “indexed monthly average”.
Women are especially vulnerable to this benefit gap since they are more likely to leave the workforce or work part-time to raise children or care for aging parents or other family members.
Working longer may offset some of those lower earnings years helping to increase your average indexed monthly earnings resulting in a higher monthly benefit.
2. Earn more. The 2018 earnings cap for Social Security is $128,400. 6.2% of every dollar you make up to that amount goes towards Social Security. Your employer also chips in the same amount. The more you earn up to that cap, the more you will receive from Social Security in the future.
When a promotion or a more lucrative job opportunity comes up you will get not only get the obvious benefit of a higher income, but may also receive a higher Social Security benefit in the future. Granted, you may pay more into the Social Security system after your next raise, but so will your employer. Besides, a fatter paycheck is almost always a good thing.
3. Stay under the income limits. Once you start receiving them, up to 85% of your Social Security benefits may be taxable. If you can, keep your income low enough to subject only 50% your benefits to tax. That can be a big savings. Lower your income far enough and you may avoid tax on your benefits altogether.
Of course, the challenge will be in having enough money to meet your retirement income needs while keeping your taxable income low. Nevertheless, if you are able to manage your taxable income in such a way that you stay under the appropriate threshold amounts, you may be able to reduce the tax bill on your Social Security benefits.
You can read more about the income limits and the percentage of your benefits that are taxable in my last post.
4. Take income from Roth IRAs. If you live long enough, delaying Social Security benefits to age 70 may put more money in your pocket every month and more money in your pocket over your lifetime.
Unless you work until age 70, you will need to take money from somewhere to pay the bills. Taking money out of Roth IRAs during retirement is one way to meet your short-term income needs while you delay your Social Security benefits up to age 70.
Since qualified distributions from Roth IRAs are tax-free, they do not go into the calculation for provisional income and do not affect the taxation of your Social Security benefits – an additional benefit of the Roth IRA.
To be a qualified distribution earnings must have been in the Roth IRA for 5 years and you must be 59 ½ or older when the distributions are made.
5. Keep your earned income below the limits or delay benefits to FRA. Full Retirement Age or FRA varies based on when you were born. Most people reading this have a FRA of between 66 and 67 years old. (You can find your FRA here).
If you have earned income this year (income from a job or self-employment) of $17,040 or more, and you are under your Full Retirement Age but do not reach FRA in 2018, you will lose $1 in Social Security benefits for every $2 you earn above that amount.
During the calendar year in which you reach your FRA, benefits are reduced by $1 for every $3 you earn above the limits. In this year Social Security has a Special Earnings Limit Rule. You can read more about the Special Earnings Rule here.
After you reach your FRA you are free to earn as much as you like with no reduction in benefits.
6. Suspend payments. Sometimes people make mistakes or change their minds. Perhaps you retired and signed up for Social Security at age 62. A couple months after retiring you realize that you want to go back to work, but are worried about losing some of your Social Security benefits.
No problem. Just contact the Social Security Administration and tell them you want to suspend your benefit. You can restart benefits in the future and your future benefits will rise in the meantime. The Social Security Administration allows people receiving benefits to suspend their benefits up to age 70. During that time they earn delayed retirement credits and their future Social Security benefit goes up.
If you change your mind during the first 12 months of receiving benefits, you will even have the option of paying back any benefits paid to you and your future Social Security benefit will be recalculated as if you never took benefits in the first place.
7. Family members’ benefits. Most American workers are entitled to Social Security benefits, if they worked for 40 quarters or more. Spouses are also entitled to benefits, either based on their own work record or 50% your benefit whichever is greater, even if they don’t meet the 40 quarter requirement.
If you have dependent children under the age of 16, they too are entitled to a Social Security benefit assuming that you are receiving benefits. And if you have a spouse of any age that cares for your minor child who is receiving benefits, they also qualify to receive Social Security benefits.
When you apply for Social Security benefits be sure to consider the possibility that other family members may be entitled to benefits as well.
Sheesh! This financial planning stuff is complicated.
Everyone’s situation is different. This series of blog posts has only scratched the surface of what is possible with your Social Security benefits.
Knowing when to begin receiving your benefits and the best way to maximize them will vary from person to person. Consult your financial advisor or other advisors to determine the best plan for you.
For more information on Social Security, check out these additional resources: