Author: Matthew Frankel, CFP | October 12, 2018
Social Security is a critical part of retirement security for most Americans
Social Security is an extremely important part of most Americans' financial security in retirement. Social Security replaces about 40% of the average worker's income, and many people rely on their benefits for most of their income after they retire.
With that in mind, here are 11 ways you may be able to increase your eventual Social Security benefits, ranging from the obvious to some outside-the-box ideas.
1. Earn more money
Let's start with the most obvious way you can increase your Social Security benefit: by earning more money. The short version of the Social Security benefit formula is that the average income of your 35 highest-earning years (up to each year's taxable maximum) is applied to a formula to determine your retirement benefit.
So, by earning more money, you can increase your averageindexed monthly earnings (AIME), which determines your benefit. Getting a side job or starting a business on the side can help you accomplish this.
2. Work for at least 35 years altogether
Unlike many pension plans, which only rely on a few years of earnings to determine your benefit, the Social Security benefit formula takes your 35 highest-earning years into account. If you haven't worked for 35 years in Social Security-covered employment, then zeroes will be averaged into the calculation for the missing years.
So, if you have worked for fewer than 35 years, it could significantly boost your benefit to try and get there before you retire.
3. Work for a few more years if you're earning a high salary
Even if you've worked more than 35 years in covered employment, it can still be a good idea to keep working. I mentioned that your Social Security benefit is determined by the average of your highest 35 years' earnings.
While it isn't true for everyone, most people earn relatively little at the start of their careers and end their careers earning a relatively high salary. For example, I have 20 years of work experience on my Social Security earnings record, but that includes the years I made about $3,000 working part-time at Burger King in high school.
Obviously, years like this can drag down your overall average. So if you're in the highest-earning part of your career and have more than 35 years of total work experience, each year you continue working can replace a lower-earning year in the Social Security benefits formula.
4. Check your Social Security statement
This isn't necessarily a way to increase your Social Security benefits, but it can certainly prevent you from missing out on benefits you're entitled to.
You can check your most recent Social Security statement by visiting www.ssa.gov and creating a mySocialSecurity account if you haven't already done so. Among other valuable information, you'll find your career earnings record for Social Security benefits.
Here's the point. These earnings records are not always perfect, so it's worth checking yours to make sure the Social Security Administration got it right. In fact, in one recent year the SSA said that it found $71 billion in wage income that couldn't be matched to anyone's earnings records. And only about half of those were eventually fixed. This is just from one year.
The bottom line is that if you don't get credit for all of your earnings, your Social Security benefit could end up being smaller than it rightfully should be.
5. Don't retire young
Many Americans don't know their full retirement age (FRA) for Social Security purposes, so here's a quick guide:
- Your FRA is 66 years if you were born in 1954 or earlier.
- Your FRA is 66 years and two months if you were born in 1955.
- Your FRA is 66 years and four months if you were born in 1956.
- Your FRA is 66 years and six months if you were born in 1957.
- Your FRA is 66 years and eight months if you were born in 1958.
- Your FRA is 66 years and 10 months if you were born in 1959.
- Your FRA is 67 years if you were born in 1960 or later.
You can choose to claim Social Security benefits as early as age 62, but doing so will result in a permanently-reduced benefit. Depending on how early you retire relative to your FRA, your full retirement benefit will be reduced according to these rules:
- Your benefit will be reduced by 6.67% for each year you claim early (0.56% per month) for up to three years before FRA.
- Your benefit will be further reduced by 5% per year (0.42% per month) beyond three years early.
So, if your full retirement age is 67 and you take Social Security at age 62, your benefit will be permanently reduced by 30%.
6. Wait even longer to claim benefits
On the other hand, if you wait beyond your full retirement age to claim Social Security, your benefit will be permanently increased at a rate of 8% per year and is prorated monthly (0.67% per month).
This means that if your full retirement age is 67, waiting until 70 -- the latest age allowed -- to take Social Security will increase your benefit by 24%, and that's not including the effects of continuing to work or any cost-of-living adjustments (COLA) that would have been given over those three years.
7. Don't forget about spousal benefits
If your spouse's Social Security benefit on their own work record is less than half of your full retirement benefit, a spousal benefit can kick in to make up the difference.
One important point to remember about spousal benefits is that while a standard retired worker's benefit can grow if you wait beyond full retirement age to claim, there's no increase in a spousal benefit for waiting. In other words, if your spouse's full retirement age is 67, there's no financial incentive for waiting longer than that to claim their benefit.
Before your spouse can get their spousal benefit, the rules say that you need to be collecting your own benefit also.
Here's the point: If your spouse is entitled to a benefit based on your work record, it rarely makes sense to delay your own Social Security benefit beyond their full retirement age.
8. Move to a state that doesn't tax Social Security
Social Security may be taxable on the federal level (more about that on the next slide), but there are only a few states that tax Social Security benefits.
As of this writing, 13 states tax Social Security benefits in one way or another:
- Four states use the IRS's procedure: Minnesota, North Dakota, Vermont, and West Virginia
- Nine states all have different rules: Montana, Colorado, New Mexico, Utah, Nebraska, Kansas, Missouri, Connecticut, and Rhode Island
To be clear, I'm not suggesting that you pack up and move simply because your state taxes Social Security. However, if you were considering heading to Florida or another state not on this list after retirement, the fact that you live in a state that taxes Social Security could certainly factor into your decision.
9. Save for retirement now with a Roth IRA
Another way to effectively boost your Social Security benefit is to reduce any taxes that may be assessed against it.
Social Security benefits are taxed by the IRS based on your “combined income.” This can be calculated as your adjusted gross income (AGI) plus your tax-exempt interest plus one-half of your Social Security benefits. If you're married filing jointly and your combined income is more than $32,000, as much as 50% of your Social Security benefits can be taxable. If your combined income is more than $44,000, as much as 85% of your benefits can be taxed. For single taxpayers, these thresholds are $25,000 and $34,000, respectively.
If you save for retirement, keep in mind that qualified withdrawals from a Roth IRA don't affect your adjusted gross income. So, if you keep a substantial portion of your retirement savings in a Roth IRA (or make Roth 401(k) contributions), it can make it easier to control how high your AGI will be in any given year after you retire, and therefore can help you avoid Social Security taxes.
10. Beware of the earnings test
If you've reached your full retirement age, you're free to collect your entire Social Security benefit, even if you're still working.
On the other hand, if you haven't reached full retirement age, your Social Security benefit can be reduced if your earnings exceed a certain threshold. This is known as the Social Security earnings test, and these are the earnings limits for 2018:
- If you'll be under full retirement age for the entire year, the exempt amount is $17,040 ($1,420 per month), and $1 will be withheld for every $2 in excess earnings.
- If you'll reach full retirement age later in the year, the exempt amount is $45,360 ($3,780 per month), and $1 will be withheld for every $3 in excess earnings. (Only months before your birth month count.)
- If you've already reached full retirement age, no earnings test applies, and your benefit will not be reduced, regardless of your income.
To be clear, any reduction due to the earnings test is technically a withholding, not lost money. After you reach full retirement age, your benefit will be adjusted upward to compensate you for the benefits you forfeited.
11. Get a do-over
If you've already claimed Social Security too early and wish you would have waited for a larger payout, you may be able to get a do-over. There are two situations where this can happen:
- If it's been less than 12 months since you started receiving Social Security, you are allowed to withdraw your application. You'll have to pay back any benefits you've received so far, but once you do, the SSA will treat you as if you've never collected Social Security at all.
- If you are receiving Social Security and have reached your full retirement age, you can choose to suspend your benefit payments until as late as age 70. While your benefits are suspended, delayed retirement credits will build and will make your monthly checks larger when you eventually decide to restart your benefits.
Maximizing Social Security can make a big difference in your financial security in retirement
As I mentioned, Social Security is a big deal to America's retirees, so it certainly makes sense to try and maximize the amount of money you'll get. After all, a relatively small increase in your Social Security could make a big difference in your quality of life after retirement.