Maximizing the size of your Social Security benefits can spell the difference between a comfortable retirement and one spent scrimping and saving just to get by. Given how important Social Security is to millions of retirees' financial security, here are three smart ways to get bigger monthly benefits.
1. Wait
The first way to increase the size of your monthly benefit checks is to wait as long as possible before electing to receive them, as the earlier you do so, the smaller they'll be.
After turning 62, you have an eight-year window in which to apply for benefits. Holding all else equal, if you claim benefits at the earliest possible time, then you'll get a larger number of checks over the remainder of your life, but each one will be smaller than it would be had you waited to apply until later in the window. Alternatively, if you wait until turning, say, 66 or even 70 years old, then you'll receive fewer checks, but each one will be larger.
The relationship between your retirement age and the size of your monthly benefits stems from the fact that Social Security benefits are "actuarially adjusted" in an attempt to ensure that the average person will get roughly the same amount in total lifetime benefits regardless of what point in the eight-year window they elect to receive them.
That being said, to the point of this article, if your objective is to increase the size of your monthly benefits, then the most direct way to do so is by waiting for as long as possible before claiming them. Delaying benefits can be especially advantageous if you expect to live past the average life expectancy of your age group, in which case you could come out far ahead in terms of total lifetime benefits.
2. Work in retirement
Another way to maximize your Social Security benefits is to continue working in retirement. This is particularly the case if you choose to begin taking benefits before reaching full retirement at age 66.
This strategy may seem counterintuitive. After all, before you reach full retirement, earned income can actually reduce a person's Social Security benefits. In 2015, if you're under your full retirement age, working, and receiving Social Security, then the Social Security Administration will deduct $1 from your benefits for every $2 you earn above $15,720.
But the important thing to keep in mind is that the withheld benefits aren't lost forever. When you reach full retirement, your benefits are increased to reflect the temporarily forgone amount.
Here's how the Social Security Administration explains this in its brochure How Work Affects Your Benefits:
Let's say you claim retirement benefits upon turning 62 in 2015, and your payment is $750 per month. Then, you return to work and have 12 months of benefits withheld.
We would recalculate your benefit at your full retirement age of 66 and pay you $800 per month (in today's dollars). Or, maybe you earn so much between the ages of 62 and 66 that all benefits in those years are withheld. In that case, we would pay you $1,000 a month starting at age 66.
The net result is that, although working while receiving Social Security benefits may temporarily reduce the size of your monthly checks, this trend reverses once your reach full retirement age, and you are repaid the withheld funds via bigger benefit checks for the remainder of your retirement. Furthermore, if your last years on the job are among your 35 highest-earning years, then they'll enhance your Social Security earnings history, thereby boosting your benefits.
3. Maximize your Roth IRA
The final way to get bigger Social Security benefits is to focus on maximizing the net amount that you keep after income taxes are assessed.
In 2015, a single taxpayer with a combined income of between $25,000 and $34,000 may have to pay income tax on up to 50% of benefits. And if he or she earned more than $34,000, then up to 85% of those benefits may be taxable.
|
Scenario |
Single Taxpayer |
Joint Taxpayers |
|---|---|---|
|
Social Security benefits not taxed if combined income is less than... |
$25,000 |
$32,000 |
|
As much as 50% of benefits taxed if combined income is between... |
$25,000 and $34,000 |
$32,000 and $44,000 |
|
As much as 85% of benefits taxed if combined income is more than... |
$34,000 |
$44,000 |
Source: Social Security Administration.
The key here is the concept of combined income, which includes items such as wages, taxable interest, ordinary dividends, taxable refunds, alimony received, business income or loss, capital gains, farm income, unemployment compensation, and taxable distributions from an IRA, pension, or annuity, among other things -- including half of your Social Security check for the purpose of calculating combined income.
But here's the thing: Qualified distributions from a Roth IRA don't factor into the calculation of your combined income. As a result, by maximizing the size of your Roth IRA in relation to other types of retirement accounts, you can reduce or eliminate the amount of Social Security benefits that would otherwise go back to the SSA.
