5 Ways to Increase Your Social Security Benefits
Social Security benefits currently make up 38% of income for most retirees1.
With over 10,000 baby boomers retiring every day, sage retirees will maximize their benefits by understanding the following ways to get the most from their tax dollars.
1. Take benefits at Your Full Retirement Age
Did you know that 69% of retirees take their benefits before their full retirement age? According to a 2012 LIMRA study, over two-thirds of retirees are taking less income than what is available to them.
This mistake could cost you a 25% reduction in benefits for life! If you file before your full retirement age, for most people this is age 66, you will never receive 100% of the benefits you’ve paid for.
Don’t follow the herd on this simple decision. Delay receipt of benefits at least until your full retirement age.
2. Better yet, wait until age 70 before filing
How would you like a 32% increase in retirement income? What if that income was inflation adjusted for life? If it sounds too good to be true, don’t worry, I’m not trying to sell you an annuity.
By delaying benefits beyond your full retirement age, you could increase benefits by 8% per year for a maximum increase of 32% by age 70.
The increase is adjusted through simple interest, however this increased amount is the base for all future cost of living adjustments (COLA).
That means that not only will you enjoy more income, but also each year it will increase more because of your higher base.
3. Take Spousal Benefits
Spousal benefits are commonly overlooked as a way to increase retirement income.
If you have been married for over 12 months (or were divorced after 10 years of marriage) you could qualify for spousal benefits.
As a spouse, you are entitled to 50% of your husband or wife’s benefit. You can take these benefits as soon as you or your spouse has reached full retirement age.
These benefits are often used to add household income while delaying filing for your personal benefits.
Before filing for personal benefits, check with your advisor about strategies that could allow you or a spouse to collect spousal benefits, particularly if you have been divorced.
4. Reduce Taxes
Did you know that if you and your spouse earn combined income of over $32,000 in retirement then 50% of your Social Security benefits are taxable?
Even worse, if your combined income totals over $44,000 per year 85% of your benefits are taxable.
That means that up to 85% of your benefits can be taxed as ordinary income! You could owe taxes at the federal level AND the state level, depending on your state of residence.
Currently, 27 states fully exempt taxes on Social Security benefits and the others have varying levels of taxation, primarily based on income.
The easiest way to minimize taxation of benefits is to limit your ordinary income.
Distributions from your IRA or 401k will increase your ordinary income so you’ll want to work with a specialist to help you coordinate withdrawals.
5. Work after age 60
Your Primary Insurance Amount (PIA) is the amount of benefits you will receive at your full retirement age. Your PIA is based on your Average Indexed Monthly Earnings (AIME).
To come up with your AIME Social Security looks at your covered earnings each year from when you first began working until age 60.
Next, they form a special average of these earnings (AIME) and use this figure to determine your full retirement benefit (PIA).
Your AIME is based on your 35 highest years’ earnings. If you didn’t have earnings in a particular year then a 0 will be placed in that year. By now, you may be asking “what about inflation?”
Well, Social Security uses indexing to even out the value of wages earned earlier in life so they are proportionally credited to the lifetime earnings on which your Social Security benefits are based.
The good news is that the Social Security Administration stops indexing earnings at age 60.
So, by working beyond age 60 your earnings are likely to be included in your top 35 highest earning years and therefore can increase your PIA.
There you have it: 5 strategies you can use to increase your Social Security Income. This article could have easily gone on 10 pages or more if I included all the caveats and “what ifs” so be sure to consult with an advisor before filing.
To learn more about maximizing your Social Security benefits visit: www.7figurebenefits.com
1Social Security Administration, Social Security Basic Facts, 2014, http://ssa.gov/news/press/basicfact.html