How to Maximize Your Social Security Benefits

Oct 3

Social Security serves as a major source of income for the elderly (those ages 65 and up), representing about 30% of their overall income according to the Social Security Administration. More than 79% of elderly beneficiaries receive 50% or more of their income from Social Security, while 27% of them rely on Social Security for over 90% of their income.

Regardless of which bucket you ultimately fall into, you’ll want to maximize your Social Security benefits so you can better enjoy retirement. In this post, we’ll lay out various approaches on how to accomplish this.

Delay your Social Security benefits

For many, this option is easier said than done—especially if you’ll depend on Social Security as your primary source of income. However, if you can delay your claim, you should to avoid leaving a lot of money on the table.

While you can collect benefits as early as age 62, you’ll receive a more robust amount (about 7% higher) each year you wait until reaching your full retirement age (the age at which you first become entitled to your full Social Security benefits). If you wait even longer, the increase is approximately 8% each year between your full retirement age and age 70.

To illustrate, let’s assume your full monthly Social Security benefit is $2,000—the amount you’d receive if you wait until your full retirement age. If you claim benefits at age 62, your benefit will be approximately 30% lower: or $1,400. As you can see, collecting too early means you could miss out on thousands of dollars a year that can help cover retirement-related expenses such as housing and healthcare.

If you’ve already started claiming benefits, reached full retirement age, and are under 70 years old, you can suspend your retirement benefits to earn a higher amount. In this scenario, you aren’t forced to repay any of your benefits, and your benefit will earn credits of approximately 8% per year: resulting in a higher monthly payment. You can reinstate benefit payments at any point until the month you turn 70—which is when they’ll automatically kick in again if you take no action. Keep in mind, however, that suspending your benefit also suspends benefits for anyone else (except for a divorced spouse) receiving checks based on your work history.

Max out your earnings

Your Social Security benefits are calculated using a complex formula but are generally based on your highest 35 years of covered earnings and the age at which you start receiving benefits—with a maximum monthly payout of $3,345 (in 2022). Your covered earnings are wages on which you’ve paid Social Security or payroll (FICA) taxes.

If you lack a 35-year work history, your benefit calculation will still include those non-work years; Social Security will simply enter a zero for each year with no earnings reported. Therefore, it’s important to raise your lifetime income average by replacing those zero or low-income years with higher incomes until you start collecting. Doing so will help you maximize the benefit owed to you.

Each year, Social Security adjusts your average career earnings per changes in the national average wage index (NAWI). These indexed wage amounts are used to determine your top 35 years of earnings. Consequenty, if the NAWI drops (which is infrequent but does happen), your Social Security benefits can as well. However, if you’re 60 years of age or older and still working, the indexing stops and your earnings flow directly into your earnings record—unadjusted—and increase the likelihood this time period will represent your new “top 35” years.

Limit Social Security taxes

Your Social Security check is liable for taxation at both federal and state levels. In 2022, if you file a joint return and your combined adjusted gross income falls between $32,000 and $44,000, you may need to pay federal income tax on up to 50% of your benefits. This amount can rise to 85% if combined earnings exceed $44,000. For individual filers earning between $32,000 and $44,000, you may need to pay tax on up to to 50% of your benefits and, if you earn more than $34,000, up to 85% of your benefits may be taxable.

If you reside in Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah, or Vermont, your Social Security income will get taxed (to varying degrees). Consequently, if Social Security will likely represent your primary source of income during retirement, you may want to avoid retiring in these states based on taxes alone.

Thankfully, you can employ several strategies to stay below the afore-mentioned income tax thresholds. One popular option is to keep money in a Roth IRA account. Since contributions are made using after-tax dollars, funds withdrawn from these accounts are tax-free—provided you make withdrawals after you turn 59½ and have owned the account(s) for at least five years.

Another way to minimize taxable income when drawing Social Security is to increase your taxable income before you start claiming benefits. You can do this by taking distributions (withdrawals) from your deferred tax accounts (such as a 401(k) or traditional IRA) since these will count as income in the year you do so.

If you’re married, coordinate benefit claims

If you’re married for at least 10 years and file for retirement benefits, your spouse becomes eligible to claim spousal benefits on your employment record (beginning at age 62). The spousal benefit amount can rise to as much as 50% (or as little as 32.5%) of what you’d receive at your full retirement age, depending on when your spouse claims the benefit. This is important to know, especially if your spouse’s own benefit is worth less.

If you and your spouse were born before 1954, you can also file for a “restricted application.” If you qualify, this means that at full retirement age, the lower-earning spouse would claim his or her benefits while the higher-earning spouse would claim spousal benefits. Then, when you both reach the age of 70, the higher earner switches to the other benefit while the lower earner can continue on the same benefit or receive the spousal benefit: whichever is higher. You need to act quickly if you plan to take advantage of this feature, as it will become obsolete on January 1, 2024.

You should also consider the impact on survivor benefits when developing your claim strategy because the surviving spouse will only receive one check: whichever is larger out of the two you were receiving. You can often maximize this amount by postponing Social Security benefits for the highest earner.

Consider working in retirement

Contrary to popular opinion, it is in fact possible to work and collect Social Security at the same time. Doing so can help push back your claim and earn you a bigger benefit.

With that said, know the SSA sets yearly earnings limits—the dollar amount you’re allowed to earn before your monthly Social Security payment is temporarily reduced—if you work before hitting your full retirement age.

Based on 2022 limits, the SSA will deduct $1 from your benefit payments for every $2 you earn above the annual earnings limit if you fall under full retirement age for the entire year. The 2022 limit for this scenario is $19,560.

If you work during the year you’ll reach full retirement age, the SSA will deduct $1 for every $3 you earn above the limit. The 2022 limit is $51,960 in this scenario, counting only earnings prior to the month you reach full retirement age.

It’s important to note that for each scenario outlined above, you won’t lose your benefits; they are technically just deferred and then credited once you reach your full retirement age. If you’re still working when you hit this milestone, your earnings no longer reduce your benefits—no matter how much you earn!

In sum: how to boost your Social Security payments

Claiming Social Security at the right time can feel like a complicated prospect, but if done right, can mean more money in your pocket—and hence, a better chance to enjoy retirement!