The Social Security Act was enacted in 1935. It created a national insurance program to provide income to retired workers. Social security was never intended to be the sole income retirees would receive. It was to be one portion of a broad retirement savings package that would include employee pension and private savings. Unfortunately, many Americans have depleted their retirement and emergency savings to cover the costs of medical care. Many retirees rely on social security as their sole source of income.
Here are 5 tips to help you maximize your social security benefits.
1. Delay Claiming
Your birthdate determines when you are eligible to begin drawing social security benefits. Visit the Social Security Administration website to confirm when you can claim your benefits.
Many Americans tap into their benefits early, but this is not a good money move. While you can start collecting social security benefits at age 62, you only receive 75% of the money you would normally receive. If you wait until your full retirement age, somewhere between 65 and 67, your benefits will be 100 percent of what you are eligible to receive. For each year after age 62 that you wait, until age 70, you increase your benefits by eight percent.
2. Work Longer to Increase Your Benefits
Many people make the mistake of thinking that their social security benefits are calculated according to an average of their lifetime earnings. However, only the highest 35 years of earnings are used to calculate your social security benefits. Events such as layoffs, injury, and illness impact your overall income and reduce your social security benefits. If you can work longer, you will move the lower-earning years out from the top 35 years. Before deciding on this strategy, check your earnings history on the Social Security website.
3. Protect Your Social Security Benefits from Taxes
Most states do not tax social security benefits, but you do have a federal obligation. It is best to consult with a tax attorney or accountant to learn about the most current income brackets and what percentage of your social security income will be taxed.
Do everything you can to minimize your tax burden. Make changes to the distribution schedule from your traditional IRA or Roth IRA. If you intend to sell assets, time the sale to minimize the amount of capital gains tax, you will need to pay.
4. Plan How to Use Spousal Benefits
If you have been married for at least ten years, you can claim your benefits and your spouse’s benefits. This is true for former spouses too. Spousal benefits can result in 50% of your partner’s social security income.
Check your earning histories to determine which of you will receive the larger benefit. Rather than claiming at the same time, whoever has lower earnings should claim when eligible and the spouse who has higher earnings should hold off until age 70.
5. Don’t Ignore Your Social Security Statements
As soon as you near retirement age, you will start receiving statements from the Social Security Administration. Even if you are not ready to retire and draw your social security benefits, you should still carefully review these statements. Pay attention to your estimated monthly retirement benefit, the amount of spousal benefit to which you are entitled, yearly earnings, and the amount your child(ren) or spouse would receive if you pass away before you reach retirement age.
The best advice is not going to come from friends and family, even if they have personal experience with the social security system. There are several key strategies that you can take to maximize your social security benefits, but it may not be something that worked for your friends. Mistakes can reduce your benefits. Consider the factors that are unique to you and consult qualified professionals such as accountants and tax lawyers.