Here's some good news and some bad news: The good news is that when it comes time to retire and enjoy a life filled with more leisure, most of us have Social Security income to look forward to. The bad news, though, is that Social Security income is not likely to be sufficient.
The average monthly retirement benefit was recently only $1,547 -- roughly $18,500 per year. If you have an above-average earnings history, you'll receive more, but still not a hefty sum. So you might want to look into strategies to put your retirement on firmer financial ground. Here are three to consider.
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1. Increase your benefits
First, see what you can do to increase your Social Security benefits. There are various approaches. The main one is delaying starting to collect them: For each year beyond your "full retirement age" (the age at which you can start collecting the full benefits to which you're entitled based on your earnings -- age 66 or 67 for most of us) that you delay claiming your benefits, they will increase about 8%. You can delay up to age 70, which can beef up your checks by 24% or 32%. (Remember, though, that you'll collect fewer checks overall, so living a longer life will make this strategy more worthwhile.) If it seems hard to delay starting to collect, you might consider tapping an IRA or other retirement account for some income, to carry you until age 70.
(Note, too, that if your health is not good or you stand a good chance of living a shorter-than-average life, starting to collect early might be your best bet. You can start collecting as early as age 62.)
Another Social Security-maximizing strategy is to work at increasing your earned income. You might work your way up your career ladder, moving from company to company and striving for hefty raises and bonuses. You might even switch careers, into a more lucrative profession. Taking some time to earn an additional certification or degree can also help.
It's also important to work enough: The formula for calculating your benefits is based on your earnings in the 35 years in which you earned the most (on an inflation-adjusted basis). So ideally, you'll have worked at least 35 years before retiring. And if you're earning a lot more than you did in the past, you might work a few years longer than you'd planned to -- because each high-earning year will kick a low-earnings year out of the calculations.
2. Coordinate with your spouse
Those who are married should develop a coordinated plan for when they start collecting Social Security benefits. Sure, if you both can delay until age 70 and you think you'll live longer-than-average lives, you can come out ahead. But there are multiple strategies for married people.
One effective strategy for couples with very different earnings history is to have the higher earner delay claiming as long as possible, to maximize that benefit. This is smart, because when one spouse dies, the other can claim either spouse's benefit, whichever is larger -- so it gives the lower earner the chance to end up with a benefit much bigger than they could have gotten on their own.
3. Minimize taxes
Finally, see if there are some ways to reduce any Social Security tax hit you might expect. That's right -- up to 85% of your benefits could be taxed. It all depends on your "combined income," which is your Adjusted Gross Income ("AGI"), plus non-taxable interest, plus half of your Social Security benefits. The following table has the details:
|
Filing As |
Combined Income |
Percentage of Benefits Taxable |
|---|---|---|
|
Single individual |
Between $25,000 and $34,000 |
Up to 50% |
|
Married, filing jointly |
Between $32,000 and $44,000 |
Up to 50% |
|
Single individual |
More than $34,000 |
Up to 85% |
|
Married, filing jointly |
More than $44,000 |
Up to 85% |
Data source: Social Security Administration.
For many retirees, there will be no taxation because they don't earn enough to trigger the tax. For other retirees, up to 50% or 85% of their benefits may be hit with a tax -- but the tax rate will be their income tax rate, not 50% or 85%. Note that Roth IRA income does not count in the calculation, as it's not taxable -- which is a good reason to give Roth IRAs extra consideration as you sock money away for retirement.
On top of this, some states tax Social Security benefits, too. Most don't, though, and even if yours does, odds are the tax will be minor, or you won't earn enough to trigger the tax.
Take some time to learn more about Social Security, because it will likely be an important contributor to your financial comfort in your retirement.
