Social Security is one of the few guaranteed sources of retirement income -- and it's not going away, no matter what rumors you may have heard. Once you sign up for benefits, the size of your checks is more or less locked in, apart from the occasional cost-of-living adjustment (COLA). So if you want the largest checks possible, you have to take the right steps before you even sign up. Here are three actions almost anyone can take to increase their Social Security checks in retirement.
1. Keep working
Working longer doesn't raise your benefits in and of itself, though it has that effect for most people. Your scheduled Social Security benefit is based on your average monthly income during your 35 highest-earning years, adjusted for inflation. This is also known as your average indexed monthly earnings (AIME).
If you don't work for 35 years, you'll have zero-income years factored in, which can drop your benefit considerably. And if you work for less than 10 years, you won't qualify for Social Security at all. But if you work more than 35 years, you'll probably see your AIME go up because most people earn more later in their careers than they did earlier. These higher-earning years replace the lower-earning years in your benefit calculation, resulting in larger Social Security checks.
To illustrate this, let's say you worked for 35 years and earned $50,000 every year, adjusted for inflation. Your AIME would be about $4,167 and your scheduled benefit would be $1,911 per month, according to the current benefit formula.
Now let's say you earned $50,000 for 35 years and then $75,000 for five years. The Social Security Administration only counts your highest-earning 35 years, so that would be the five years you earned $75,000, plus 30 years where you earned $50,000. That would bring your AIME to $4,464 and your scheduled benefit to $2,006 per month, all from working five more years at a higher income level.
2. Wait to claim benefits
Above, we looked at how to calculate your Social Security benefit at your full retirement age (FRA). That's 66 or 67 for today's workers. But if you don't sign up at that age, the Social Security Administration runs another calculation to determine how much you qualify for at your chosen starting age.
Starting early can drop your benefits by as much as 30%, while delaying benefits up until the age of 70 could increase your checks by as much as 32% over the scheduled amount you qualify for at your FRA.
Delaying benefits usually results in a larger lifetime benefit for those who make it to their 80s or beyond. But it's not the right call for everyone. If you don't think you'll live that long, starting early and getting as much as you can from the program while you're alive is usually the wiser move.
Delaying benefits can also be tough if you need your checks to cover your everyday expenses, but you have other options besides starting right away at 62 and waiting until your FRA or 70. You can sign up for benefits anytime after your 62nd birthday and every month you delay helps.
Delaying by one month will increase your checks by 5/12 of 1% if your FRA is 67. If you qualified for a $1,200 benefit at 62, your benefit at 62 and 1 month would be $1,205. Over a 30-year retirement, that's an extra $1,800, just for delaying benefits by one month.
3. Watch out for benefit taxes
The federal government and some state governments tax Social Security benefits, so you have to watch your taxable income if you want to avoid this. To avoid federal benefit taxes, you have to keep your provisional income -- your adjusted gross income (AGI) plus nontaxable interest and half of your Social Security benefits -- under $25,000 for a single adult and $32,000 for a married couple. States all have their own benefit tax formulas, so you'll have to look yours up to figure out how to avoid it.
Limiting how much you withdraw from your tax-deferred retirement accounts can reduce your risk of owing benefit taxes. If you have Roth savings, you can rely upon these instead when you approach the applicable threshold for benefit taxation so you can hold onto more of your money.
Avoiding Social Security benefit taxes may not be possible in all situations, though. If you have a large mortgage payment or a lot of expenses, you may not be able to keep your provisional income low enough to hold onto all of your benefits. But limiting your spending can still reduce how much you have to give back to the government.
If you're a long way off from claiming age, it's possible Social Security will look different when you sign up than it does now. But the three above tips will still remain true. If you want your largest possible benefit, keep these things in mind. Don't forget to reevaluate your retirement plan, including your plans for Social Security, at least once per year so you can make changes, if necessary, without derailing your finances.