When it comes time to retire, you may be surprised that the average Social Security benefit isn't quite as generous as you expect. In fact, the average benefit in 2021 will come out to just $1,543. That's hardly a fortune, and it isn't meant to be since Social Security is supposed to replace only around 40% of your pre-retirement income.
Still, while your benefits are unlikely to be enough to serve as your sole source of support, they'll probably be an important source of your retirement income. And the good news is there are things you can do throughout your career to maximize the size of your checks. Here are four big ones.
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1. Plan to wait to claim benefits
Your age when you start getting your Social Security checks is one of the factors that has the biggest impact on your monthly income. While you can start your benefits as early as 62, the amount you receive each month goes up every year you delay until the age of 70. As a result, if you want the most monthly income possible from Social Security, you should wait until then to start your benefits.
But waiting until 70 to claim your checks isn't always possible, because many people are forced to leave the workforce sooner than that due to health issues, family, or lack of employment. If you want to make sure you're able to delay until 70 so you can get the biggest monthly Social Security check available, plan for that early by saving enough to support yourself without benefits if you have to leave the workforce early. If you do that, you'll be able to live off your savings and delay the start of your Social Security checks.
2. Choose a Roth IRA for retirement investment
As a retiree, your Social Security benefits aren't taxed until your provisional income exceeds a certain threshold: $25,000 as a single tax filer or $32,000 for married joint filers.
The key word there, however, is provisional income. That isn't total income -- instead, it's half your Social Security benefit plus some non-taxable income (such as municipal bond interest) along with all taxable income. Now, while income from a traditional 401(k) or IRA is considered taxable, income from a Roth account is not. That means you can withdraw as much from your Roth as you want without rendering your Social Security subject to tax.
If you want to maximize your future benefits, contributing to a Roth early on and throughout your career makes a lot of sense, especially as you can avoid some of the complications of converting to a Roth later on.
3. Plan to work longer to replace low-earning years
Your Social Security benefit amount is determined using a formula that takes into account average wages in your 35 highest-earning years (after wages over your career are adjusted for inflation).
Obviously, if you don't work a full 35 years, that can be a problem because you could find yourself with years of zero wages included in your average. Most retirees, however, will actually do better if they work for more than 35 years. That's because it's common for people to start out with low salaries early in their career or to have some years during their career where their income was lower than normal -- perhaps because of a job loss that left them with no income during part of the year.
If you're earning more toward the end of your career on an inflation-adjusted basis than at any time during your earlier working years, it can make a lot of sense to stay in your position long enough for some of your later high-earning years to push out lower ones when your average is calculated. Don't count on early retirement if your goal is to maximize your Social Security checks.
4. Take steps to increase income
Finally, you may want to consider doing whatever you reasonably can to increase your income during your career since, as mentioned above, your benefit is based on average wages during your working years.
This may mean negotiating hard for raises and for a higher salary whenever you find a new job, or improving your skills to boost your wages. You may also want to work a side gig for a few hours a week to give your income a further boost and raise your benefit down the road.
If you take these four steps, you should hopefully have a Social Security benefit that's large enough to provide a good chunk of your income as a retiree. You will absolutely still need supplementary savings as you can't live on Social Security alone. But your larger benefit will provide you with a little extra financial security, especially as benefits are protected against inflation and are guaranteed for life.
