Social Security has gone from being a minor supplement for workers who had already made their own arrangements to save for their old age to the key financial support for tens of millions of retirees. With so much riding on your benefits, you can't afford to make any mistakes with your Social Security.
Yesterday, I looked at why it's so difficult to make a smart Social Security decision and touched on some of the issues you need to consider in making your choice. Today, let's go into more detail with some concrete ideas on how to manage your Social Security benefits.
Tip 1: Claiming early benefits while you're still working is usually a bad idea.
Many people believe you should claim Social Security as early as possible, even if you're still working. But if you haven't reached full retirement age, your annual Social Security benefits will get reduced by $0.50 for every dollar of annual earnings above $15,120. Even if you're scheduled to hit full retirement age, your benefits will still get reduced by a third of your earnings above $40,080 for the year.
Since claiming early benefits reduces your monthly benefit for the rest of your life, accepting reductions for work earnings almost never makes sense. You're better off waiting and claiming higher benefits later.
Tip 2: Two strategies for spousal benefits.
If you're married, you may be entitled to claim Social Security either on your own work record or on your spouse's. Specifically, once you reach full retirement age, your spouse can claim a spousal benefit once you file for your own benefit.
But if you'd prefer to defer your own benefit until a later date to increase your monthly payment, you can immediately suspend your benefit. That still allows your spouse to receive Social Security based on your work record, but it lets your own benefit grow as if you had done nothing.
If you have a substantial work history of your own, claiming spousal benefits while letting your own benefit grow can be a no-brainer, amounting to essentially free money. Consider: If you're entitled to spousal benefits of $1,000 or your own full retirement age benefit of $1,000, you might think it doesn't matter which one you choose. But by taking spousal benefits while deferring your own benefit until later, you can collect that same $1,000 while gradually boosting your own later payment by as much as 32%.
Tip 3: Consider survivors.
Keep in mind that if you're married or have minor children, your Social Security goes on after your death. For spouses, a spousal benefit that was half of your monthly payment will become a survivor benefit that pays the full payment amount.
That means you have to consider both your and your spouse's life expectancies to get your analysis correct. Leave your spouse out, and you could end up taking benefits earlier than you should to maximize family income.
Tip 4: Don't forget investing.
You'll find a lot of analysis of Social Security that considers break-even scenarios using only total payments received. But if you don't need the money right away, you can still take it and invest it. The greater the return you can get, the more it shifts optimal solutions toward taking benefits earlier.
The problem, of course, is that investing is riskier than the certain return of delaying Social Security. PIMCO Total Return Bond (NYSEMKT: BOND ) and iShares Core Total US Bond ETF (NYSEMKT: AGG ) have performed well on a total-return basis. But their yields are fairly low, and many investors fear rising rates in the future as causing trouble for bond investments.
Meanwhile, throughout the 2000s, retirees relied on Bank of America (NYSE: BAC ) , General Electric (NYSE: GE ) , and US Bancorp (NYSE: USB ) for strong returns and lucrative dividend income, with all three appearing on the Dividend Aristocrats list because of their long track record of rising payouts. But the financial crisis forced all three of them to cut their dividends. Even though their stocks have recovered to some extent, their experience is a good example of how counting on investing to replace higher benefits is a dangerous proposition.
Tip 5: Don't forget taxes.
Finally, be sure to keep taxes in mind in claiming. As your income goes up, more of your benefits get taxed. That opens the doors to tax-management strategies, such as doing conversions to Roth IRAs during your career in order to keep income levels during retirement lower. Roth distributions don't count as income for applying the Social Security tax test, and so paying conversion taxes might end up saving you a bundle in taxes on your Social Security.
You've worked hard for Social Security, so make sure it works hard for you. By taking advantage of these strategies, you can make sure that you get as much as you can in Social Security benefits.
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