Social Security benefits account for 50% or more of household income for around half of all married senior couples and more than 7 in 10 singles. These important benefits are earned throughout your working life, but unfortunately many people don't realize there are ways to increase benefits they'll receive during their senior years.
Here's a list of five smart ways you can boost your Social Security income.
1. Work long enough to max out your benefits
The Social Security Administration uses a formula to determine how much you'll receive in monthly income. This formula factors in your highest 35 years of earnings, adjusted for wage growth. If you've worked for fewer than 35 years, you'll have years of $0 earnings factored in, which will decrease the average wages benefits are based on. To avoid this, consider staying in the workforce a little longer.
If you were earning far less at the start of your career than the end, it may also be worth working longer so some of those early years of low wages are replaced.
Say you started out earning the equivalent of $20,000 at the beginning of your career and earned 3% raises each year for 35 years. If you worked exactly 35 years, your average wage would be $34,549. But if you worked for one additional year, your average wage would jump to $35,586 because that first year, when you earned $20,000, would be replaced by your $56,277 salary in year 36. If you worked 40 years, your first five years of low earnings would be replaced by higher-income years, and your average wage that determines benefits would equal $40,695.
2. Increase your earnings
Because benefits are based on average wages, earning more income -- and paying more Social Security tax -- can also boost your Social Security benefits. However, both taxes and benefits are capped, so you couldmax out if your salary gets too high. In 2018, you cap out at $128,400 in taxable wages.
You can increase your income by negotiating your salary and raises, investing in education, and potentially taking on a side gig. The more you earn over your lifetime, the bigger the benefit you'll receive as a senior when you need the cash.
3. Delay claiming Social Security benefits
Delaying claiming Social Security is another possible way to increase your monthly benefit. The Social Security Administration bases your standard benefit on retiring at full retirement age (FRA), which is 67 for people born post-1960. Retiring before age 67 reduces your benefits by 5/9 of a percent per month if you retire 36 months early or less. For each month prior to 36 months early, benefits are reduced by an additional 5/12 of a percent.
The earliest age you could retire is 62, so if you retire as soon as you're able and your FRA is 67, monthly benefits would be reduced by a full 30%. This reduction is permanent once it occurs, unless you take drastic steps such as stopping benefits within a year of claiming and repaying what you've received.
By contrast, if you wait until after FRA to retire, benefits increase. The increase equals two-thirds of 1% per month, and occurs each month until age 70 when benefits no longer increase if you wait. The increase also lasts throughout retirement, so you'll receive a higher monthly benefit during all your remaining years.
Because you miss out on years of benefits, you'll need to calculate your breakeven point -- the point at which the higher monthly benefit makes up for years of benefits you didn't receive. If you live longer than this point, you're better off for having waited to claim benefits. Otherwise, you get a higher monthly benefit but miss out on income you'd have received by getting benefits for more years.
This chart can help you to understand how waiting or claiming early affects your benefits, and how long you'd need to live to break even.
4. Move to a state where your benefits won't be taxed
There are 13 states that tax Social Security income for at least some recipients -- Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont, and West Virginia.
If you live in one of them, relocating to a state where benefits aren't subject to taxes would mean you keep more of your Social Security check -- effectively increasing your benefits. And if you move to a state with a lower cost of living, your benefits would stretch further.
5. Develop a strategy with your spouse
Finally, it's important to make sure you work with your spouse so you both get the maximum benefits. There are many different claiming strategies married couples can use, but a common one is for the higher earner to delay claiming benefits while the couple lives off benefits paid to the lower earner.
This allows for the couple to maximize the benefits of the higher earner -- which helps both spouses because when either spouse dies, the survivor can claim the bigger benefit for the rest of his or her life.
Another approach is for a lower earner to claim spousal benefits, which is an option only after the higher earned has begun collecting -- unless you're divorced. Divorced spouses can claim benefits on an ex's work record as long as the marriage lasted at least 10 years.
Because there are so many claiming strategies for married couples, determining which is right for you can be very complicated. Consider talking with a financial advisor specializing in Social Security to determine the right approach.
Maximizing your Social Security benefits is worth it
Social Security benefits are an important source of income because they last for your entire lifetime and because they go up as cost of living rises. Maximizing them just makes sense, so be sure to follow these tips to get the most money possible to see you through your senior years.
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