Four Strategies to Boost Retirement Income
Planning for retirement involves careful consideration of many financial aspects, one of which is Social Security. Understanding how Social Security works and how to maximize your benefits can significantly impact your retirement income. In this article, we’ll explore four key strategies to increase your Social Security benefits and help you secure a more comfortable retirement.
Understanding Social Security Funding
Before diving into the strategies, it’s important to understand how Social Security is funded. When you look at your pay stub, you’ll see various deductions including federal taxes, state taxes (depending on where you live), and FICA taxes, which are payroll taxes that fund Social Security.
How FICA Taxes Fund Social Security
Social Security is funded through a payroll tax of 6.2% on your income up to a certain limit, which was $160,200 for 2023. Both you and your employer contribute this amount. Additionally, there is a Medicare tax of 1.45%, but this goes towards Medicare, not Social Security. The first key takeaway is that Social Security is funded specifically through these payroll taxes, not through traditional federal or state income taxes.
How Social Security Benefits Are Calculated
Your Social Security benefits are calculated based on your 35 highest-earning years. If you’ve earned significantly more in recent years than in the past, Social Security adjusts for this by indexing your past earnings to account for inflation.
Indexing for Inflation
For example, the maximum income subject to Social Security taxes was $57,600 in 1993, whereas in 2023 it’s $160,200. Social Security applies an inflation adjustment to your past earnings and then uses your highest 35 years of indexed earnings to calculate your benefit. If you haven’t worked for 35 years, those years will be filled with zeros, which can significantly reduce your benefit.
Earnings and Means Testing
It’s important to understand that Social Security benefits are means-tested. This means that not all your earnings are treated equally when calculating your benefit.
Means Testing Explained
For instance, the first $1,115 of your monthly earnings is weighted more heavily—90% of this amount is included in your Social Security benefit calculation. Earnings between $1,115 and $6,721 are weighted at 32%, and any amount above $6,721 is only weighted at 15%. This means that lower earners get a proportionally larger benefit than higher earners. Therefore, someone earning half as much as another person may receive more than half the Social Security benefit.
Understanding Full Retirement Age
Your full retirement age (FRA) is another key factor in calculating your Social Security benefits. For most people, FRA is between 66 and 67, depending on your birth year. If you were born in 1960 or later, your FRA is 67.
What Full Retirement Age Means
FRA is the age at which you’re entitled to your full Social Security benefit, known as your Primary Insurance Amount (PIA). However, you can choose to start receiving benefits as early as age 62, though this will result in a reduced benefit. Conversely, if you delay receiving benefits until after your FRA, your benefit will increase by 8% for each year you wait, up until age 70.
Four Strategies to Maximize Your Social Security Benefits
Now that you understand the basics of how Social Security works, let’s explore four strategies you can use to maximize your benefits.
1. Work for at Least 35 Years
Since Social Security calculates your benefit based on your highest 35 years of earnings, it’s crucial to work for at least 35 years to avoid having zeros in your benefit calculation.
Why This Matters
Filling all 35 years ensures that your benefit calculation is based on actual earnings rather than zeros, which would lower your average and thus your monthly benefit. Even if you can’t work full-time or at a high-paying job, any additional earnings will help maximize your Social Security benefit.
2. Delay Collecting Benefits
While you can start collecting Social Security benefits as early as age 62, delaying until your full retirement age—or even until age 70—can significantly increase your benefit.
The Benefit of Waiting
If you start collecting before your FRA, your benefit is reduced by 5% to 6.67% for each year you collect early. However, if you wait beyond your FRA, your benefit increases by 8% per year up until age 70. This increase is a powerful tool for those who can afford to delay, particularly if you have a longer life expectancy or other sources of retirement income.
3. Understand and Maximize Spousal Benefits
If you’re married, you’re entitled to a spousal benefit, which can be as much as 50% of your spouse’s Social Security benefit at their FRA. This also applies to divorced spouses, as long as the marriage lasted at least 10 years.
How to Maximize Spousal Benefits
If your spousal benefit is higher than your own Social Security benefit, you can opt to receive the spousal benefit instead. This is particularly beneficial if one spouse had significantly lower earnings or stayed home to raise children. Understanding this option can lead to a significant increase in the total Social Security benefits your household receives.
4. Plan for Survivor Benefits
Survivor benefits allow a surviving spouse (or even an ex-spouse) to receive the deceased spouse’s full Social Security benefit. This is an important consideration for couples when planning for retirement.
Using Survivor Benefits to Your Advantage
If you’re a widow or widower, you can choose to collect a survivor benefit first, while allowing your own benefit to continue growing until age 70. At that point, you can switch to your own higher benefit. Alternatively, you could collect your own benefit first and let the survivor benefit grow. Either way, understanding these rules can help you maximize your lifetime Social Security income.
Coordinating Social Security with Other Retirement Income
It’s essential to remember that Social Security is just one part of your retirement income puzzle. To make the most of your benefits, you should coordinate your Social Security decisions with other factors such as taxes, retirement income from other sources, and investment withdrawals.
Tax Planning and Social Security
Social Security benefits can be taxable depending on your combined income. Therefore, coordinating your Social Security claiming strategy with your tax planning can help you minimize taxes and maximize your net retirement income.
Conclusion
Maximizing your Social Security benefits requires an understanding of how the system works and careful planning. By working at least 35 years, delaying benefits when possible, understanding spousal and survivor benefits, and coordinating Social Security with other retirement income strategies, you can increase your retirement security and enjoy a more comfortable lifestyle.
At Considerate Capital, we specialize in helping our clients make the most of their Social Security benefits while coordinating with their broader retirement and financial planning needs. If you’d like to learn more about how we can help you maximize your retirement income, contact us today.
