Is retirement on your near-term radar? If so, congratulations! You've worked hard. Now it's time to live life on your terms.
If Social Security is going to make up meaningful portion of your retirement income, however, there are several things to know and/or do before you call it quits and claim your monthly benefits. Here are five of the most important ones to consider if you're looking to maximize your eventual Social Security payout.
1. Work through the end of the year
If you didn't already know, your Social Security payments are based on the 35 years you earned the most money. It's OK if you won't be working a full 35 years -- you can still collect. In these cases, the Social Security Administration (SSA) simply uses a zero as your earnings figure for every year less than 35 that you didn't work. You'll end up receiving smaller payments than a comparable earner that did work 35 years, but you're still eligible for retirement benefits.
The earnings the SSA considers, however, are based on the income you report for tax purposes. For individuals, that's also the calendar year. Ergo, if you can hang on through the end of the year -- or continue working for a full 35 years -- you should try to do so.
2. Or at least work one more full month... maybe
Sticking it out all the way to the end of a calendar year just isn't possible? That's OK too. But some workers would still benefit by remaining employed for at least a few more weeks.
If you've already reached your full retirement age (FRA) (as listed below) at the time you're ready to retire, you'll get credit for every month you delay filing for benefits.
Data source: Social Security Administration.
It's not a huge amount, to be clear. Each additional month you wait only increases your eventual monthly payout by less than 1% once you do begin taking payments.
Still, that's something -- particularly if you like your job and don't mind doing it a bit longer.
Do note that these prorated monthly increases for delaying your benefits stop once you turn 70. So, at that point, there's no additional advantage to waiting any longer.
Also, if you haven't reached your full retirement age, working longer will mean a smaller reduction in your monthly payment from what you'd receive if you waited until FRA.
3. Check out your spousal benefits options
This option doesn't bolster everyone's Social Security payments, but it's possible you could collect bigger benefits payments through spousal benefits options.
Simply put, this choice pays a spouse up to half of a higher-earning spouse's retirement payments, if that amount is greater than the retirement benefits he or she would be due based on his or her own earnings record.
Image source: Getty Images.
There are a couple of restrictions to this option you'll want to keep in mind. Those are, the person seeking spousal benefits must be at least 62 or caring for a child who is under age 16 or receiving Social Security disability benefits. The other spouse must have claimed retirement benefits on their own account. And if the choice is made before the spouse seeking spousal benefits has reached full retirement age, the benefit amount is permanently reduced. So choose wisely.
Either way, there's no cost or commitment to check with the Social Security Administration how this option might impact your future benefits.
4. Move to a state that doesn't tax Social Security income
OK, it's not a way of directly boosting your eventual monthly benefits amount, and it's certainly not a viable option for most retirees. However, it is a way of keeping more of your future benefits. That is, live in a state that doesn't impose a state tax on Social Security payments.
That's most states, by the way. There are only 12 states that currently treat Social Security benefits as taxable income in some cases. Those are:
- Colorado
- Connecticut
- Kansas
- Minnesota
- Missouri
- Montana
- Nebraska
- New Mexico
- Rhode Island
- Utah
- Vermont
- West Virginia
Live anywhere else, and you sidestep that burden.
That said, do know that Social Security is subject to certain federal income taxability no matter where in the United States you live. Up to 50% of your payments are potentially taxable, according to the Social Security Administration, if you're an individual filer earning between $25,000 and $34,000 per year. If your income exceeds $34,000 per year, up to 85% of your benefits become taxable as ordinary income. Those income thresholds are raised to $32,000 and $44,000 for couples filing a joint return.
5. If you're going to keep working, know your income limits
Last but not least, just because you're claiming Social Security retirement benefits soon doesn't necessarily mean you have to stop working. There's one related matter to consider, however, if that's your plan. That is, if you've not yet reached your full retirement age and you earn too much at a job, Social Security will reduce your benefits. For 2023, the Social Security Administration will deduct $1 in payments for every $2 you earn above and beyond the full-year limit of $21,240.
It's not the end of the world if it happens. Social Security credits you for these deductions, raising your future payouts as a result. These payment reductions can prove inconvenient, though, cutting off income you were otherwise expecting when you were expecting it.
Also note that these reductions only apply if you're not yet at your full retirement age. Once you've reached your FRA, there are no deductions, no matter how much you earn in wages.
There is one slight exception to this rule that might specifically apply to you: In the year in which you're going to or do reach your official full retirement age (66 or 67), Social Security only reduces your benefits payments by $1 for every $3 you earn above an annually adjusted limit. For this year, that limit is $56,520. And, as before, you're still credited for any such reduction now with increased payments in the future. That's another good reason to continue working full-time through the end of a full calendar year, particularly if you need the money now and aren't going to exceed that income limit.