Social Security is the largest source of retirement income for most Americans and replaces about 40% of the average person’s pre-retirement income. Yet many people do not take the time to understand how Social Security calculates benefits or how to maximize these benefits, potentially leaving thousands of dollars on the table during retirement.
Here are three tips to help you maximize your Social Security benefits so that you receive as much cash as you can during your golden years.
Wait as Long as You Can to Claim Your Benefits
Nearly half of Americans collect Social Security benefits as soon as they are eligible at age 62. Some people do this because they need the income. Others do it because they are afraid that Social Security will not exist in the future and they want to get their money while they can.
Although it is tempting to apply for benefits as soon as they are available, doing so will cost you. This is because for each year that you delay collecting, your benefits permanently increase by about 8% until you reach age 70.
For example, let us say that your full benefit amount is $1,500 per month if you retire at your full retirement age of 67. If you claim your benefit at age 62 instead, then your monthly benefit will be reduced by 30% and will only be $1,050. On the other hand, if you wait until age 70 to collect your benefits, then your monthly amount will be $1,860. That is an eye-opening difference, especially considering that your monthly benefits might have to last into your 80s, 90s or beyond.
Understand How Social Security Calculates Benefits
Many Americans do not understand how Social Security determines benefits. A common myth is that benefits are based on your last 10 years of working. It is true that you need 40 quarters or about 10 years of Social Security contributions before you can begin collecting payments, but benefits are actually based on your 35 highest years of inflation-adjusted earnings.
So if you are making more money in your later years than you did when you were younger, then it might be a good idea to keep working a few more years so that your higher-income years replace some of your lower-income years. For example, if you made little money during one year in your 20s, then you might want to work 36 years instead of 35 to replace that low-income year. This will increase your monthly benefits.
Work While You Collect Benefits (But Keep an Eye on How Much You Earn)
A common myth is that you cannot collect benefits while you are working. This is somewhat true because Social Security limits how much you can earn and still receive full benefits if you file before your full retirement age. If you file early and continue to work in 2016, then the amount deducted is $1 for every $2 that you earn over $15,480. If you file early but reach full retirement age during 2016, then the amount deducted is $1 for each $3 that you earn above $41,880 until the month that you reach full retirement age.
If you file early and continue to work in 2017, then the amount deducted is $1 for every $2 that you earn over $16,920. If you file early but reach full retirement age during 2017, then the amount deducted is $1 for each $3 that you earn above $44,880 until the month that you reach full retirement age.
If you work but do not make more than these amounts, then your benefits are not reduced. And once you reach your full retirement age, your benefits increase to make up for the benefits that were withheld earlier. In other words, if your earnings cause a reduction in benefits, then your benefits are permanently increased at a later date. Keep in mind, too, that once you reach full retirement age, Social Security does not take any deductions no matter how much you earn.
If you need help maximizing your Social Security benefits, navigating the increasingly complicated tax system or setting up a small business, then please contact us. Finding the right tax and bookkeeping professional is essential if you want to maximize income and reduce taxes. Gallati Professional Services knows how to do just that. Alexis E. Gallati, EA, MBA, MST has more than 12 successful years of working for other certified public accounting firms and opened Gallati Professional Services in 2014. Give her a call at (865) 281-1461 and let her help you today.