Is retirement on your short-term radar? If so, congratulations! You’ve worked hard. Now it’s time to live life on your terms.
However, if Social Security is going to make up a significant portion of your retirement income, there are several things you should know and/or do before quitting and claiming your monthly benefits. Here are five of the most important ones to consider if you want to maximize your eventual Social Security benefit.
1. Work until the end of the year
In case you didn’t know, your Social Security benefits are based on the 35 years in which you earned the most money. It’s no problem if you don’t work the full 35 years; you can still collect. In these cases, the Social Security Administration (SSA) simply uses a zero as your earnings figure for each year under age 35 that you were not working. You’ll end up receiving smaller payments than a comparable earner who has worked for 35 years, but you’ll still be eligible for retirement benefits.
However, the income the SSA considers is based on the income you report for tax purposes. For private individuals, this is also the calendar year. Ergo, if you can last until the end of the year – or work for 35 years – you should give it a try.
2. Or at least another full month of work… maybe
Is it just not possible to last until the end of a calendar year? That’s okay too. But some workers would still benefit from staying on the job for at least a few more weeks.
If you have already reached your full retirement age (FRA) (as listed below) when you plan to retire, you will receive credit for each month you delay filing for benefits.
Data source: Social Security Administration.
To be clear: this does not involve large amounts. Each additional month you wait only increases your final monthly payout by less than 1% once you start receiving payments.
Still, that’s something, especially if you like your job and don’t mind doing it a little longer.
Please note that these pro-rated monthly increases for deferring your benefits will stop once you turn 70. At that point, there is no additional benefit to waiting any longer.
Even if you not you have reached your full retirement age, working longer means a smaller reduction in your monthly payment compared to what you would receive if you waited until FRA.
3. View your partner benefits options
This option won’t boost everyone’s Social Security payments, but you may be able to receive larger benefits through spousal benefit options.
Simply put, this choice pays a spouse up to half the retirement payments of a higher-income spouse, if that amount exceeds the retirement benefits he or she would owe based on his or her own earnings.
Image source: Getty Images.
There are some limitations to this option that you should keep in mind. That is, the person applying for spousal benefits must be at least 62 years old or must be caring for a child under the age of 16, or be receiving disability benefits. The other spouse must have applied for a pension benefit on his or her own behalf. And if the election is made before the spouse claiming spousal benefits reaches full retirement age, the benefit amount is permanently reduced. So choose wisely.
Either way, there are no costs or obligations associated with checking with the Social Security Administration to determine how this option may affect your future benefits.
4. Move to a state where Social Security income is not taxed
OK, it’s not a way to instantly increase your final monthly benefit amount, and it’s certainly not a viable option for most retirees. However, it is a way to keep more of your future benefits. That is, live in a state that does not impose state taxes on Social Security benefits.
That’s most states, by the way. There are currently only twelve states that consider Social Security benefits as taxable income in some cases. They are:
- Colorado
- Connecticut
- Kansas
- Minnesota
- Missouri
- Montana
- Nebraska
- New Mexico
- Rhode Island
- Utah
- Vermont
- West Virginia
If you live somewhere else, you avoid that burden.
That said, do know that Social Security is subject to some federal income tax regardless of where you live in the United States. According to the Social Security Administration, up to 50% of your payments are potentially taxable if you are an individual filer and earn between $25,000 and $34,000 per year. If your income exceeds $34,000 per year, up to 85% of your benefits will be taxable as ordinary income. Those income thresholds increase to $32,000 and $44,000 for couples filing a joint return.
5. If you want to continue working, know your income limits
Last but not least, just because you’re soon claiming Social Security retirement benefits doesn’t necessarily mean you have to stop working. However, there is one related issue to consider, if that is your plan. That is, if you have not yet reached your full retirement age and you earn too much at a job, Social Security will reduce your benefits. For 2023, the Social Security Administration will deduct $1 in payments for every $2 you earn over the $21,240 annual limit.
It’s not the end of the world if it happens. Social Security will credit you for these deductions, increasing your future payouts. However, these payment reductions can prove difficult because they cut off the income you would otherwise have expected when you expected it.
Please also note that these discounts only apply if you have not yet reached full retirement age. Once you reach your FRA, there are no more deductions, no matter how much you earn in wages.
There is one small exception to this rule that might apply specifically to you: In the year in which you enter or reach your official full retirement age (66 or 67), Social Security will only reduce your benefits by $1 for every $3 you earn above an annually adjusted limit. For this year, that limit is $56,520. And as before, you will still be credited for such a reduction now, with higher payments in the future. That’s another good reason to continue working full-time until the end of a full calendar year, especially if you need the money now and aren’t going to exceed that income limit.
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