How to Maximize Your Social Security Benefits
All of the information in this booklet is based on the data at the government’s social security website www.ssa.gov effective for 2016, unless otherwise stated. But rather than repeat the rules, we show you how to USE the rules in plain English to maximize what you have coming to you. Figures change annually, so consult the government’s web site for 2015 later. We answer five questions for you.
- Can you do anything to potentially increase your social security check before you retire?
- At what age is it best to start social security?
- How can married couples help maximize the joint benefits?
- What methods are available to reduce or avoid tax on your social security benefits?
- How can you earn money and still collect social security benefits?
Coming Up on Retirement
You may have simple question like, “What can I do now to get the biggest check?” The answer is not much but you do have some possibilities if married (explained later). Your social security benefit is based on your 35 highest years of income. So even if you have a couple “break-the-bank” years of earnings just before you retire, it won’t have much impact on your social security check for two reasons.
- (a) Each of the 35 years gets an equal weighting so two years out of 35 (2/35) could only impact what would be for example, a $1,300 monthly check by $74.
- (b) High earning years have a minimal impact because of the 420 months in the calculation (12 months x 35 years). The first $856 you earned in a month counts six times as much as the monthly earnings over $5,157. And annual earnings over $118,500 will not help you at all (for 2016, increasing each year thereafter).
- If you are single, the only option to increase the size of your social security benefit is to delay your starting date as explained in the next section. (However, if you are divorced or widowed, you may be able to collect on the earnings record of your deceased or ex-spouse as early as age 60).
When Should You Start Social Security—Age 62,65,70?
This is really a straightforward question and if the math were the only factor, here’s the straight forward answer: wait at least until “full retirement age”. Following is the table of full retirement ages and the reductions for starting social security payments early.
So let’s take this hypothetical example:
You were born in 1952 and turned age 62 in 2014, Your full retirement age is 66. You are projected to receive $1,500 monthly at that time. However, you could start your benefits at age 62 and receive $1,125 (25% reduction). So do you wait and get $1,500 monthly at age 66 or take $1,125 now at age 62?
Some people argue that if they start benefits at age 62, they will get a smaller monthly amount but they could invest it. Hypothetically, if you could invest the funds at 5% guaranteed and that you view yourself as having average life expectancy you would still not come out ahead by starting payments at age 62. (This calculation can be done using any financial calculator or spreadsheet with a present value function and the above assumptions).
Because there is more to life expectancy and discount rate, here are the other factors to consider:
How Do I Get the Most for My Spouse?Once you start to consider several of these factors at once, you may be get a headache. Unfortunately, there is no blanket answer as to when to begin social security payments to maximize the benefit. This is an issue a retirement advisor can calculate for you taking into account your entire financial and personal situation.
Let’s look at an example; Margaret just turned 62 (before 1/1/16) and her husband is 64. Margaret has not worked for the past 10 years and worked 20 of the last 35 years. If she retires now, she’s entitled to a monthly payment of $400 (after the 25 percent reduction for starting benefits retirement at the age of 62). When Margaret’s husband retires at the age of 66, in two years, his monthly Social Security benefit will be $1,350. Margaret could claim her social security today and receive a benefit based on his work record. This will come to $472.50, or 35% of her husband’s benefit (see prior table). You may have heard that spouses get 50% of the higher-earning spouses benefit-but that’s ONLY if they wait until their own full retirement age to start collecting benefits.
How Do I Reduce/Avoid Income Tax On My Social Security Benefits?
The basic rule is that social security benefits are taxable if your “modified adjusted gross income” (defined as your adjusted gross income from your income tax return plus 50% of social security benefits plus-tax exempt interest plus exclusions per IRS publication 915 exceeds the following limits:
Therefore, if you can engineer your includable income below these limits, you may be able to reduce or eliminate taxes on social security income. This may be possible using annuities. While this is not a recommendation to buy annuities, just because they can help reduce the tax on your social security income, the table below illustrates how this is possible in some circumstances.
Using fixed Annuities to Reduce Tax on Social Security Benefits
Hypothetical Illustration-Not Indicative Of Any Specific Product
Annuities are long-term investments and are guaranteed by the claims-paying ability of the issuer as are tax-free bonds, while CDs are FDIC-insured. Annuities and tax-free bonds cashed in prior to maturity may result in gains or loss and withdrawals from annuities prior to term may incur surrender charges. Withdrawals from CDs prior to term may incur early withdrawal penalties. Purchases or redemptions of tax-free bonds or annuities may incur commissions or charges. Withdrawals from annuities are taxed as ordinary income and withdrawals prior to age 591/2 are subject to a 10% penalty. Tax-free bonds used for certain private use purposes may be subject to alternative minimum tax. This comparison does not include State income tax, which might change the results. Federal tax calculation per 2016 rates published at www.irs.gov, married filing joint. $12,600 standard deduction and $8,100 of personal exemptions.
You can see from the above table that if out hypothetical couple, Mr. and Mrs. Smith, move money from CDs to municipal bonds to fixed annuities, the amount of their social security income subject to tax changes, as does their total federal tax. Their lowest tax situation is with the deferred annuity. If they need to withdraw the interest from the annuity, this solution won’t help them, as they come out ahead only if they allow the interest to reinvest.
Earn All You Want and Still Collect your Full Social Security
Because of a prior rule, some people still think there are limits on how much you can earn and still collect all of the social security to which you are entitled. That is still true for people who opt to take social security before full retirement age (age 66 for those retiring now). However, those working after full retirement age can have unlimited amounts of earned income and still collect their full social security benefit. Here’s the rule and then let’s look at an example.
Rule: If you are under full retirement age when you start getting your Social Security payments, $1 in benefits will be deducted for each $2 you earn above $15,720 (for 2016). In the calendar year you attain full retirement age, $1 benefits will be deducted for each $3 you earn above $41,880 (for 2016) up to month of full retirement age attainment.
Mrs. Smith, age 62 in March of 2016 decides to retire from employment and start her reduced social security benefits at the rate of $12,000 annually ($1,000 per month). She also decides to start a business. By age 63, her business is earning a net profit of $20,000 annually. She will need to give up $2,140 ($20,000-$15,720/2) of her annual social security for this reason: During those months before you reach full retirement age (age 66 for someone born in 1953 like Mrs. Smith), your social security benefits are reduced $1 for each $2 you earn over $15,720 (for 2016).
Mrs. Smith keeps working at her business and by 2019, the year she reaches full retirement age, her business is earning $50,000 annually. For January and February of 2019 (assuming rates don’t change), she must give up $451 of social security ($1 for every $3 her business earns over $41,880 in the year she reaches full retirement age, prorated for 2 months) and once March 2016 arrives and she becomes 66, she can earn unlimited amounts from her business and will never give up any social security income.
For the test above, earnings include bonuses, commissions and vacation pay, but don’t include pensions, annuities, investment income, interest, veterans or other government or military retirement benefits.
Best of Both Worlds-File and Suspend
The benefit below is restricted as follows:
- The lower-earning spouse will have needed to turn age 62 before 2016.
- The higher-earning spouse will need to file and suspend before April 30, 2016.
- The higher-earning spouse must be age 66 before April 30, 2016.
If all 3 conditions are not met, then the file and suspend strategy will no longer be available. The new replacement rule after 4/30/16: the lower-earning spouse can only file and receive spousal benefits if the higher-earning spouse is also receiving benefits.
File and Suspend Before 4/30/16
In order for your spouse to get benefits based on your social security account, you are required to file for benefits. However, you may not want benefits now because of waiting, you can collect more later. There may be a way to have your cake and eat it too (if the above three conditions are met by 4/30/16).
If you have reached full retirement age (see earlier table) then you can file for benefits but tell the Social Security Administration to hold up on the payments. Now that you have filed, your spouse can file for their spousal benefit.
Now, you can earn delayed credits up to age 70 so you can get a larger check later while your spouse enjoys up to half of the benefits today.