The average Social Security benefit for a retiree is around US $ 1,543 per month. However, it is not a universal benefit. Your Social Security benefit is personalized based primarily on your personal earnings history and the age you are when you apply for benefits. This stereotyped approach helps to improve the fairness of the program by linking what you earn from the program, at least a little, with what you earn in the form of taxes.
It also means that you have some level of influence on the size of your Social Security check. These five Social Security secrets can help you receive even bigger checks than you would otherwise have. Before using them, it is important to recognize that they all involve trade-offs between things like time, money and effort. If you decide that it is not worth doing whatever it takes to get that bigger Social Security check, the choice is yours. Make sure you have another source of revenue to cover your costs.
Image source: Getty Images.
1. Wait a few years to receive benefits
You can receive your Social Security retirement benefits at any time on or after you turn 62. The longer you wait between your 62nd birthday and your 70th birthday, the bigger your monthly check will be. How bigger? Well, it depends in part on the year you were born, but the concept is usually the same, no matter what year it is.
If you were born in 1960 or later, your full retirement age is 67. Taking Social Security at 62 would reduce your monthly check by 30% of what you would receive for receiving it at full retirement age. On the other hand, taking Social Security at 70 would increase your monthly benefit by 24% of what you would receive at full retirement age. Therefore, if the total retirement age benefit were $ 2,000 per month, you would receive $ 1,400 per month starting at 62 or $ 2,480 per month starting at 70.
The downside you face is that, when you start younger, you make money for longer. As a result, you should consider deciding what is most valuable to you, getting money earlier, when you are more likely to use it, or getting more money each month.
2. Work more years
Image source: Getty Images.
Your Social Security benefit is based on your highest income for 35 years, indexed based on national average salary levels during those years. If you have worked for less than 35 years, some of those years will be entered as $ 0 of income when calculating the benefit amount. On the other hand, if your salary has increased over time, so that you earn closer to the end of your career than at the beginning, you can replace low-income years with higher years.
There are some advantages and disadvantages to this choice. First, the Social Security benefit formula includes “tipping points” which means that those low-income years are worth more proportionately than the higher-income years. This means that your benefit will not increase as much as you expected, based on replacing a $ 10,000 income year with a $ 80,000 income year.
Second, working more years means you’re working more years. If you love your job and expect a long and healthy retirement, feel free to do so. Otherwise, you should seriously ask yourself if continuing to work for a few extra dollars a month will really make a big difference.
3. Earn more money each year
The higher your income, the greater the Social Security benefit you accrue based on that year’s earnings, up to an annual limit. In 2021, that limit is $ 142,800. Therefore, if your income is less than that amount, you can prepare yourself for a greater benefit by increasing your income. Unfortunately, this also involves trade-offs.
On the one hand, the same bending point problem applies here – the higher your income, the less incremental benefit you will get from earning it. On the other hand, for most of us, earning more means having another job, which means more hours of work.
Another thing to consider is that nowadays, many “secondary activities” involve being an independent contractor. This requires that you pay the employer and the employee the Social Security tax, which makes it more expensive than receiving a direct salary from your employer.
4. Get your retirement savings within a Roth IRA
Image source: Getty Images.
Up to 85% of your Social Security income can be taxable, depending on your tax return status and total income level. The income considered in this calculation includes tax-free income, like the interest you would get from tax-free municipal bonds.
Under current rules, one of the few sources of retirement money that will not subject your Social Security to taxes is to make qualified retirement withdrawals from a Roth IRA. So, if you can get most of the money you plan to use for your retirement within a Roth IRA before you start collecting Social Security, you can increase the net amount of your check that you can keep.
The downside is that you need to start this plan decades upfront, saving within a Roth 401 (k) and / or Roth IRA or you need to convert your money from a traditional plan to a Roth plan. The advantage of Roth-style plans is that you get tax-free withdrawals on retirement, but the downside is that you pay taxes on the money you invest in those plans. That means your contributions or your conversions are taxable income in the year you make them. You may find that these initial costs are not worth the increase in your Social Security check later.
5. Get a unique increase in your benefit check
As long as you are past full retirement age, when you apply for benefits for the first time, you can ask Social Security to retroactively pay benefits up to six months ago. This retroactive claim will give you a unique boost, but it comes with compensation.
The downside is that it is not about free money, but as if you had claimed benefits six months earlier. Since the amount of your benefit is based on the age you are at the time of ordering, receiving this increase will cost you in the form of smaller monthly checks for the rest of your life.
Still, there may be good reasons for making this change. For example, if you pass your 70th birthday without claiming your benefit, this six-month lookback window can earn you money that you otherwise would have lost permanently.
Likewise, if you are finalizing Roth IRA conversions from your retirement money, you may want to no start Social Security while you’re still making these conversions to keep your total tax burden low. Delaying Social Security until the beginning of next year and claiming these benefits retroactively may make sense in this scenario.
Social Security Plan as part of your total retirement plan
Regardless of how you expect your Social Security benefit to be, it is likely that it will not be sufficient on its own to cover the costs you will face in retirement. While you can take advantage of these five secrets to get a bigger check, you must also focus your efforts on building enough savings to take care of the costs that Social Security won’t make.
That way, you can spend less time worrying about the compensation you’re making to get that bigger Social Security check and more time planning ways to enjoy retirement. Ultimately, you’ve worked your career to get to that point in life, and the more you focus on enjoying retirement, the better.