Social Security is one of the most important sources of income for most retirees, but not everyone gets the same size check each month. Several factors determine your benefit amount, but understanding the system can help you get the most possible. Arm yourself with knowledge to make the best decisions around retirement age, benefit collection, and tax planning. A smart approach will result in a more comfortable retirement.
1. Delay collecting Social Security
The easiest way to increase your monthly Social Security benefits is to start taking benefits at a later age. Full retirement age (FRA) is 67 years old for Americans born after 1960, and it's between 66 and 67 for people who were born from 1955 to 1959. You get 100% of your monthly benefit if you start taking payments at FRA. People can start collecting as early as age 62, but that can reduce your monthly payment by as much as 30%. Waiting until age 70 to take payments can increase your Social Security checks by 32%. There's no extra incentive to wait beyond your 70th birthday.
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Delaying isn't a viable option for everyone, and it might not even be the best strategy to maximize cash flows. Social Security income is essential for many retirees who wouldn't be able to make ends meet without it. That can be especially true with rising healthcare costs and inflation. A person who elects to start benefits at age 70 will also take more than a decade to surpass the cumulative payouts to someone who started at 62.
If you are confident in job security through your 60s, enjoy working, and are likely to enjoy longevity, then you may want to consider delaying Social Security benefit collection.
2. Maximize earned income
This is easier said than done, of course, but it's still something to consider. Your monthly benefit is based on your average indexed monthly earnings (AIME), which is your average monthly income during your 35 highest-earning years. You can check your personal status by requesting a statement from the Social Security Administration.
Obviously, "just make more money" isn't particularly useful advice. However, there are steps you can take to get your AIME higher. For example, you can base your retirement timing on this information. If you don't have 35 years of earned income subject to Social Security taxes, then it drags the average down significantly.
You might also have several years of relatively low earnings from the time before you launched your career, when young children were in the house, or during transition periods. You might have to add a few years of relatively higher earnings at the end of your career to make sure that your AIME is based on 35 years of good income.
For self-employed people, AIME will also reflect the amount of income claimed on tax returns. Small business owners are understandably eager to identify deductions that reduce their tax bill, but you might benefit from a more strategic approach. Recognizing higher income in some circumstances could pay off in the form of higher Social Security benefits for yourself and your spouse.
3. Minimize taxes
Finally, you can take home more of your Social Security checks by minimizing taxes on that income. Social Security benefits can be taxed at the federal level if your income meets certain thresholds.
Joint filers reporting more than $32,000 in annual income are likely to have a portion of their Social Security benefits taxed. Many senior households are able to live comfortably under this level, but it still affects a lot of retirees. Anyone with a pension has a good chance of exceeding that limit. These people might actually have incentive to take smaller collections earlier in retirement as a result.
Distributions from 401(k) and traditional IRA accounts are also considered income, so your distribution strategy should take this into account. People with significant investment income from dividends and interest are also likely to incur taxes, so plan your allocation and distributions accordingly.
Social Security benefits are also taxed differently from state to state. There are 37 states that don't tax those benefits, while most of the remainder have a similar approach as the IRS, with income thresholds and partial taxation. There's not much you can do in this regard that hasn't been covered above, but you might want to take this factor into consideration if you're deciding between different places to move for retirement.
