When it comes to social security it can be easy to fall into the trap of thinking there is nothing you can do to influence the amount you receive in your monthly checks. The truth is, even though the government does have a set formula to determine disbursements, there are a few things you can do to get the most out of your social security benefits.
In summary, these things are:
- Don’t retire early
- Claim your spouse’s benefits
- Watch Your Taxable Income When Drawing Benefits
- Put in at least 35 years of work
- Earn as much as you can while you can
Let’s unpack those points a bit further:
Don’t Retire Early
The full retirement age, or FRA, is a number chosen by the government that can have a substantial impact on the size of your social security checks. Most people eagerly look forward to retirement and will choose to retire as soon as they reach the earliest official retirement age, which is 62. However, this can reduce the size of your retirement checks by up to 26 percent. Instead of retiring early, it is better to wait until you reach your FRA in order to receive the full amount that you qualify for. The FRA used to be 65 but that has been changing in recent years. Now, anyone born after 1938 but before 1959 has a gradually increasing FRA. For example, if you were born in 1955, your FRA would be 66 years and 2 months.
The FRA if Your Over 67
The FRA is for anyone born after 1959 is 67. If you were born somewhere between 1938 and 1959 you may want to use a government calculator to ensure you are correctly determining your FRA. Congress justifies this recent change by claiming that life expectancy are increasing, and more people of advanced age are reporting better health. The important take away from this is that you should be sure to wait at least until your FRA before you consider retiring. If you can continue to work longer then that, your monthly check will increase by about 8 percent for every year past your FRA that you stay in the workforce. This means that if you were born in 1954 your FRA will be 66. If you continue to work for 4 years after that until you hit 70, your monthly checks will be about 32 percent larger than if you had started drawing them at 66. Your monthly checks could be even larger if those additional 4 years of income increase your overall average monthly earnings.
Claim Your Spouses’ Benefits
Another way to increase the amount of your monthly social security checks is to claim whatever portion of your spouses’ benefits you may qualify for. If your spouse made significantly more than you did while you were in the workforce you could be entitled to up to half of their benefits. The Social Security Administration says that they will always start by paying out your benefits first. However, if your spouses’ benefits are higher than your own you can receive a combination of benefits up to the amount that your spouse receives. This will allow you and your spouse to receive the same benefits even if your spouse had a higher income than you did during your working years. This can also apply to divorced couples if you were married up to 10 years before the divorce occurred and you never remarried. If this is the case, you may still be able to claim benefits based on your ex-spouses’ working history.
Watch Your Taxable Income When Drawing Benefits
You do still have the option of earning an income once you start drawing your social security benefits. If you choose to go this route though, you will need to be careful that you don’t earn too much above your government-determined threshold or you could have a negative impact on your benefits, especially if you have not yet reached your full retirement age. For example, if you haven’t reached your FRA yet but are receiving social security benefits you can earn around $17,000 a year without having your benefits affected. However, once you go over the exact government-specified amount you will lose $1 from your total benefit payments for every $2 you earn over the specified amount. Once you reach your full retirement age you can earn up to around $45,000 a year before your benefits are affected. It is important to note that these numbers are estimates as the exact figures change every year due to inflation adjustments, but this can give you a general idea of how taxable income works once you start receiving social security benefits and give you a few things to look out for to help guarantee you don’t hurt your social security payments.
Put in at Least 35 Years of Work
How long you work can be just as important as the age that you choose to retire. This is due to the way the government calculates eligibility for social security and the amounts that are paid out each month. During your working years, you are paying into social security and earning credits to make you eligible to receive benefits while at the same time you are influencing the amount of money you may receive. For every $1,320 that you make you can receive one credit and can earn up to four credits a year. You are eligible for social security benefits once you earn 40 credits. This means that technically you would be able to start drawing benefits after just 10 years of work. This is not a good idea though, primarily for two reasons. The first is the full retirement age that was mentioned earlier and the way it can impact your monthly checks. The second reason you do not want to retire before working at least 35 years is that the government calculates your monthly check amounts by averaging your highest salaries for 35 years (adjusted for inflation of course). It is important to note that they don’t average your highest income for years worked up to 35 years, they average your highest income per year for 35 years total. This means that if you have worked for only 25 years, those extra 10 years will be counted as zeros, and the 25 years of income will be averaged out over 35 years. This amount would then be the basis for your monthly benefit checks. This is why it is important to work for at least 35 years. Even if you aren’t earning much, it is still better to have a little something coming in those years than nothing.
Earn as Much as You Can While You Can
While it’s better to earn a small something than to earn nothing for those 35 years that will determine your benefit check amount, it is, of course, better to still earn as much as you can. This is not just for the up-front benefit of having more money coming in, but also because, as previously mentioned, your highest income-earning years will be averaged out by the government. This means the more you earn a year the more you can boost your average. So, do what you can to increase your income while you are still part of the workforce. This may mean starting a side job doing freelance work or fixing cars (wherever your talents are) or getting a part-time job. Elevating your income for even a few years will have a dramatic impact on your social security payments when the time comes. It’s also better to try to consistently earn at a high rate than to focus on choosing jobs or opportunities that may give you a high income for a year or two but leave you with little income for a few years. Choosing high-paying opportunities with no guarantee of job security or longevity can end up hurting both your present finances and your retirement funds and social security benefits.
Remember, it’s all About Averages
The important thing to remember is that it’s all about averages when it comes time for the government to calculate your social security checks. So, do what you can to earn a steady, high income for at least 35 years. Don’t retire until you reach your full retirement age, and even then, the longer you can continue working the better off you will be financially. If you continue to earn money while drawing social security benefits, make sure you aren’t doing more harm than good when it comes to your checks. And don’t forget to apply for any spouse benefits, even if you’re divorced. If you do these things, stay informed of the government’s ever-changing policies on social security, and make wise decisions as you move forward, you will be able to make the most of your social security checks and enjoy your retirement to the fullest.