When you plan on having Social Security provide a substantial portion of your retirement income, it is important to do everything you can to increase the value of your monthly benefit.
While your Social Security checks will never be enough to support you without additional funds, you can follow these four steps to get the most money possible, if they are expected to finance much of your retirement.
Image source: Getty Images.
1. Maximize your earnings
Your monthly Social Security benefits are equal to a percentage of your average indexed monthly earnings, or AIME. A higher AIME translates to a larger scan.
Your AIME is calculated by adjusting your wages for inflation and determining your average earnings over the 35 years when your income was highest. This means that you can maximize it by increasing your income as much as possible throughout your career (up to the Social Security base salary limit) and working for at least 35 years. If you work for less time, your AIME would be reduced by including $ 0 salary years in your average.
If your earnings have increased over your career (after adjusting for inflation), working over 35 years can also help to maximize your benefits. That’s because you’ll replace an initial low-income year with a higher-income year in your AIME calculation.
2. Don’t start your checks until 70
Each retiree has a standard benefit, or primary insurance amount, based on their AIME. But you may not get that exact amount. Early deposit penalties will reduce you if you claim your checks before your full retirement age (FRA). And late retirement credits can increase you whenever you delay the start of your benefits after the FRA.
Late retirement credits can only be earned until you reach the age of 70. They cause your monthly check to increase substantially. For each month of delay, they increase the value of your check by two-thirds of 1%. This results in an 8% annual benefit increase for each year you expect.
If you hope to use Social Security checks to finance a good portion of your retirement, you cannot afford to miss the huge increase in benefits that come with the postponement.
3. Understand all the benefits you can get
In some cases, the best way to obtain the maximum Social Security income is to claim benefits based on someone else’s work record. Specifically, you can apply for spouse or survivor benefits.
These are not only available to those who are married or who were married when the spouse died. Spouse benefits are also available to those who have been married for at least 10 years before divorce, as long as they have not remarried. And survival benefits are also available for divorcees, as long as their marriage lasted 10 years or more and they did not remarry before they were 60 (or before 50 if they are disabled).
The Social Security Administration will not necessarily help you figure out how to maximize your benefits by being strategic when claiming spouse or survival benefits. Be sure to do some research to understand everything you are entitled to.
4. Minimize taxes on your Social Security
Finally, if you expect Social Security to provide you with a large retirement income, you cannot afford to withdraw more taxes from your checks than necessary.
The good news is that Social Security benefits do not become taxable until your provisional income reaches a certain limit. The bad news is that the limit is too low. Once your provisional income (your taxable income plus half of your Social Security benefits plus some non-taxable income) reaches $ 25,000 as a single filer or $ 32,000 as a married joint filer, you will be partially taxed on your Social Security funds .
If your other retirement money comes from a Roth IRA, however, your distributions are not taxable income, so they will not put you above that income limit. In order to extend your Social Security as much as possible, you must invest in a Roth throughout your career, instead of a traditional account.
If you are approaching retirement age or are already retired, however, don’t assume that a Roth conversion is the right measure to protect your Social Security from taxes. Roth’s conversions can have important financial implications for current and near-retirees that you need to make sure you understand.
Ideally, if you expect to get as much money out of Social Security as possible, you should take action early in your career, as several of the strategies on this list – how to maximize income and invest in a Roth – are best initiated when you are young and have many years until retirement. Keep in mind, however, that regardless of the measures you take, it is unlikely that you will be able to live on Social Security alone, so having a supplementary income is essential for a safe retirement.