Making the most of your Social Security benefits can help ensure your financial comfort in retirement. Many people know that if they want to receive more from the government program, they should consider waiting until age 70 to start benefits and make sure they work at least 35 years. But going beyond the basics could get you more from the program and set you up for an even better retirement.
Here are three secrets for maximizing Social Security benefits.
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1. Keep working in your 60s
When the Social Security Administration calculates your retirement benefit, it uses your 35 highest-earning years, adjusted for inflation. But those inflation adjustments are tied to the year you turn 60.
Any earnings after age 60 don't receive any adjustment, but hopefully, you'll continue to receive raises at least in line with inflation every year. If that's the case, the earnings in your 60s will likely displace earnings from earlier in your career that are only adjusted higher through the year you turn 60. That can increase the average earnings from the 35 highest-earning years of your career, thus increasing your Social Security benefit.
Working past age 60 is even valuable if you started a high-paying career early in life and earned above the maximum taxable earnings every year. Since the maximum taxable earnings receive inflation adjustments every year, earnings throughout your 60s will continue to increase your benefit by displacing older earnings even after the inflation adjustment. That can add hundreds of dollars to your monthly benefit for those trying to maximize Social Security.
2. Keep your taxable income low
Some of your Social Security income could be taxable if your income is too high in retirement. The IRS uses a metric called combined income to determine how much, if any, of your Social Security benefits are taxable. The formula is the sum of half your Social Security benefits, your adjusted gross income (AGI), and any untaxed interest income. If your combined income exceeds certain thresholds, up to 85% of your Social Security could be taxed.
If you're trying to maximize how much of your Social Security benefits you get to keep, you'll want to keep your AGI low. The two biggest contributors to your AGI in retirement are likely traditional retirement account withdrawals and capital gains.
With some smart planning, you can set up your retirement accounts to reduce the amount you need to withdraw while collecting Social Security. That may involve things like Roth conversions and strategically taking capital gains in your 60s before starting Social Security.
That said, if you continue to work into your late 60s, the tax hit from strategic Roth conversions could be worse than paying extra taxes on Social Security income. But with some smart planning, you could significantly reduce your total lifetime tax liability by strategically paying some taxes earlier and avoiding a bigger tax bill later while collecting Social Security.
3. Coordinate with your spouse
When it comes to claiming Social Security as a single person, the strategy for getting the most out of the program is relatively simple for the majority of healthy retirees: Just wait until age 70 to start collecting benefits. But when you and your spouse are planning household strategies for Social Security together, it gets a lot more complicated.
Most households will want to maximize survivor benefits. Survivor benefits allow a lower-earning widow(er) to collect the same amount their higher-earning spouse was receiving before passing away. That means most couples should have the higher-earning spouse wait until age 70 to start benefits.
But the lower-earning spouse may benefit from claiming much earlier. Often, couples can maximize the lifetime household income if the lower-earning spouse starts Social Security as soon as they're eligible. In instances where the lower-earning spouse could receive more from spousal benefits than their personal benefit, they shouldn't wait past their full retirement age, when spousal benefits max out.
Claiming earlier than age 70 needs to be balanced against the opportunities to keep working and increasing benefits and opportunities to position retirement accounts to reduce your tax liability. Strategies can get complex quickly, and it may be worthwhile to consult an expert on your specific situation and retirement goals.
