Social security provides income for retirees, widows, widowers, and disabled individuals based on their age and former work salary. Benefits are managed by the Social Security Administration, which also runs the Medicare and Medicaid programs.
While every American is entitled to social security benefits, the amount received will vary. Since benefits aren’t static, there are different social security strategies you can employ to help maximize your benefits when it’s time for you to receive them.
If you need assistance with your finances, work with a professional financial advisor from Good Life Financial Advisors of Mt. Pleasant. We’re ready to help create a personalized plan for your specific needs.
Know the Formula of the Program
The formula for calculating social security benefits isn’t complicated, but it’s one you should memorize. The program takes your highest 35-year income earnings period and uses that as an average (after factoring for inflation). Income max is $132,000, meaning you won’t have anything above that amount calculated into your formula. Of course, you don’t pay FICA tax on anything above that amount either, so it’s a fair deal. This average is called your Average Indexed Monthly Earnings (AIME). If you haven’t worked for 35 years, you won’t get the max benefit, so try to squeeze out at least 35 years of employment before retiring.
Next, you’ll need to find your “full retirement age”. This will be either 65, 66, or 67 years of age depending on the year you were born. Anyone born after 1960 has a full retirement age of 67. Social security benefits can be tapped as early as age 62, but you’ll sacrifice a certain percentage annually. If you take the benefits as early as possible, your monthly income will be reduced by as much as 30%. Waiting until full retirement age guarantees the maximum monthly benefit, so only take social security early if you need the money. If you want to retire before your full retirement age and can live off your investments for the first couple of years, do that instead of taking social security early.
Understand Spousal Benefits
Married couples have a big advantage when it comes to social security. If you have a spouse with a much higher income, you can collect benefits based on their salary—not your own. In fact, you don’t even need to currently be married. If you and your spouse were married for at least 10 years, you qualify for spousal benefits. However, if you want to collect your spouse’s benefits, you’ll have to wait until he or she begins collecting as well.
One popular strategy is to take the lower earner’s benefits first and delay the higher earner’s benefits until age 70 (the maximum age you can delay). Once you turn 70, switch to the higher earner’s benefits, which will now be for the maximum monthly amount.
Another advantage is present for non-working spouses. Usually, you must work and pay FICA taxes for 40 quarters to be “fully insured” for OASDI benefits. However, if you or your spouse are unemployed, you can still collect social security based on the working partner’s income. The non-worker must be of retirement age to collect the benefits, though.
Consider Your Tax Burden
Social security benefits are usually taxed, depending on your income level. In 2020, that base level is set at $25,000. If your adjusted gross income is less than $25,000, you won’t owe any taxes on your social security benefits. Above that threshold, taxes are owed on a portion of your benefits. Tax rates vary, but you’ll only be taxed on 50% of your benefits if you make less than $34,000. Above $34,000 means that 85% of your social security benefits will be subject to taxation.
How can you reduce your adjusted gross income in order to lower your tax bill? One way is by funding a Roth IRA. A Roth is funded with after-tax dollars and you won’t owe Uncle Sam anything on your investment gains. A Roth IRA has a contribution limit of $7,000 if you’re older than age 50, which can be deducted from your annual income. Additionally, distributions from a Roth IRA won’t count as taxable income for social security purposes.
Social security has many other additional credits, like benefits for retirees with dependents or widows and widowers whose spouse didn’t live to retirement age. Navigating the various rules and regulations can be tricky though, so always discuss your plan with a financial advisor and make sure you’re leveraging all available avenues of the program. You don’t want to leave money on the table, especially when the government is footing the bill.
Work With an Experienced Financial Advisor
We hope you consider these social security strategies to help maximize your benefits. If you have any questions or need help creating a retirement plan, don’t hesitate to reach out to a team member from Good Life Financial Advisors of Mount Pleasant today.