Whether Social Security only forms a small chunk of your monthly retirement budget or the whole thing, it's a pretty safe bet that you want that money to go as far as possible. That means doing your best to maximize your income during your working years and also learning some key Social Security rules that influence the size of your checks.
There are three things in particular that are worth knowing if you're already on benefits. Understanding these will help you avoid costly mistakes that leave you picking up even more financial slack on your own.
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1. How to maximize your lifetime benefit by carefully timing your Social Security claim
Choosing the right claiming age for your life expectancy and financial situation can help you maximize your lifetime benefit. Generally speaking, early claiming makes sense for those with short life expectancies and those who cannot afford to cover their bills without Social Security. But those who can wait and expect to live into their 80s or beyond often get more by delaying their claim.
You can sign up at any point between 62 and 70. Each month you delay benefits increases your checks a little, and the rate of increase picks up over time. Those who wait beyond their full retirement age (FRA) -- 67 if you were born in 1960 or later -- score the largest checks.
The easiest way to see how your claiming age affects your benefits is to create a my Social Security account. Here, you can view benefit estimates at every claiming age based on your work history to date and future projections.
Look at a few ages -- for example, 62, FRA, and 70 -- to see the difference in monthly benefits. Then multiply each of these by 12 and then by the number of years you expect to claim checks to see which would give you the largest lifetime benefit. For example, a $2,000 benefit claimed for 20 years gives you a lifetime benefit of $480,000.
2. How to undo your application if you regret signing up early
The Social Security Administration gives you two pathways to grow your benefits after signing up for the program. This is a nice fallback if you didn't understand how your claiming age affects your checks when you first applied.
You can withdraw your Social Security application if it's been less than one year since you signed up. You can only do this once, and if you're successful, the Social Security Administration will treat your second application as if it was your only application. The catch is, you must repay all benefits you and anyone else claiming on your work record has received to successfully withdraw your application.
If you can't do that, you can suspend your Social Security application when you reach your FRA. This method doesn't require you to repay any benefits, but you will need to cover your expenses on your own for a while. Every month you skip checks grows your future benefit. The Social Security Administration will automatically begin sending you your new, larger checks in the month you turn 70 unless you request that they start earlier.
3. How to prepare yourself for Social Security benefit taxes
The federal government taxes the Social Security benefits of all seniors whose provisional income -- adjusted gross income (AGI), plus any nontaxable interest from municipal bonds, and half your annual Social Security benefit -- exceeds $25,000 for single adults and $32,000 for married couples.
The following table breaks down the percentage of your benefits you could owe ordinary income taxes on:
|
Marital Status |
0% of Benefits Taxable if Provisional Income Is Below: |
Up to 50% of Benefits Taxable if Provisional Income Is Between: |
Up to 85% of Benefits Taxable if Provisional Income Exceeds: |
|---|---|---|---|
|
Single |
$25,000 |
$25,000 and $34,000 |
$34,000 |
|
Married |
$32,000 |
$32,000 and $44,000 |
$44,000 |
Data source: Social Security Administration.
These thresholds do not increase annually for inflation, so even if you don't owe them now, they could still affect you in the future. Seniors in some parts of the country could also owe state benefit taxes.
You can budget for these taxes on your own if you expect to owe. An accountant might be able to help you with this. Or you could request that the Social Security Administration withhold money for taxes up front. If you choose this route, you'll get any excess that was withheld back with your tax refund.
