Social Security will make up a big part of your retirement income. Understanding how Social Security works will help you get the most money possible. Many people have no idea on how to maximize its benefits, which puts them at a disadvantage. Here are 10 ways you can maximize your Social Security benefits to help you plan for a better financial future.
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Know Your Full Retirement Age (FRA)
FRA or Your Full Retirement Age is the age when you are allowed to get your full Social Security monthly benefit amounts (without any deductions). For most people this is between 66 and 67, depending on the year they were born. If you begin receiving benefits before your FRA, you will receive less per month, sometimes by as much as 30%. If you know your full retirement age, this can give you a better idea of how to plan. By delaying your retirement, you will receive a higher monthly benefit.
Work for 35 Years or More
Social Security benefits are based on your highest 35 years of earnings. The years you don’t work are zeros in the calculation. This will reduce your average monthly income, and cut down on your benefits. Working for 35 years makes sure that you have the maximum amount considered for your benefits. If you are still able to work, then it is probably worth working longer, especially if you have a few years with low earnings.
Delay Benefits for Higher Payouts
You could start collecting Social Security at age 62. However, you will have lower monthly payments if you start early. Wait until full-retirement age (FRA), and you get your full benefit. If you wait until 70 to take your benefits, your monthly payments will increase further up to an extra 8% for each year you wait past your FRA. That means you get more money each month.
Understand Spousal Benefits
If you are married, spousal benefits can be a way to top up what you would otherwise collect from Social Security. If your spouse’s benefit is higher than yours, you can get an amount equal to 50% of what they receive. Upon the death of a spouse, you might be able to switch to their larger benefit amount. We recommend you speak to a Social Security rep, or research it yourself in order to better understand these spousal benefits.
Coordinate with Other Income Sources
You should factor in your other income streams while planning a Social Security strategy. For example, if you have a pension, retirement accounts or savings to draw upon, then you do not need to claim Social Security benefits right away. By coordinating these sources, you can decide the best time to start receiving benefits. For example, if you have enough savings to cover a few years of expenses, consider delaying your benefits so that you get more in your monthly check later on.
Plan for Taxes on Benefits
You may have to pay taxes on your Social Security benefits depending on your total income. If your total income — including half of your Social Security benefits — is above certain limits, then some of your benefits are taxable. For many people, this could mean paying taxes on up to 85% of their benefits. These taxes should be taken into account in your budget planning.
Factor in Cost-of-Living Adjustments (COLA)
Each year, Social Security benefits are adjusted for inflation with Cost-of-Living Adjustments (COLA). Here, your benefits could grow with inflation every year, making sure that you can still buy the same goods and services down the road. If the cost of living rises, a COLA can prevent your benefits from shrinking in value. For retirement planning, keep in mind that although prices may rise over the years, so too may your Social Security income.
Consider Health and Longevity
Your health and family history are important factors in deciding when to take Social Security benefits. If you expect to live a long life or have a family history of long life, it might be better to delay your benefits. That way, you get higher monthly payouts over a much longer period. However, if you have health issues and there is a possibility you may not live as long, waiting may be less of an advantage.
Review and Adjust Plans Regularly
Since your financial situation and needs are likely to change over time, it is a good idea to periodically review your Social Security plan. Life changes such as retirement, health changes or fluctuations in income can influence your approach. You might have to adjust in order to get the most out of your benefits. Staying flexible and ready to adapt your plan can help you get the most out of your Social Security.
Educate Yourself on Social Security
Understanding how Social Security works will help you make better decisions with your benefits. There are many resources available, like the website for Social Security Administration, local offices and community workshops. Understanding what choices you have at your disposal also helps you to decide when to apply for benefits, as well as how and what you will receive from the process. The more you understand, the better off you will be when planning for Social Security and your future.
Disclaimer – USA Money Matters does not provide and does not intend to provide financial, investment, tax, or legal advice. Information contained in this article is for informational and educational purposes only. This list is solely the author’s opinion based on research and publicly available information. The inclusion of links to third-party content is not an endorsement by USA Money Matters of such content or services. Use your discretion.