When Social Security was created in 1935 it was not conceived of as a primary stream of income for retirees. However, since then many things have changed, including a dramatically increasing life expectancy rate. Therefore, nowadays it is essential that you pay close attention to how you can maximize the benefits you will receive from Social Security once you have retired.
Work a minimum of 35 years
Social Security benefits are calculated based upon the 35 years in which you earned the most. If you do not have at least 35 years of work on record you will have some years which will count as zero years. This will reduce your overall benefits received from Social Security.
Increase your income
Since your benefits are calculated based upon your earned income while you are still working, it is best to try to earn as much as you can before you start receiving Social Security benefits. You may want to ask your employer for a raise or take on a second part-time job to earn extra money. The more you earn the more your benefits will be during retirement.
Full retirement age
It is best to avoid claiming your Social Security benefits before reaching what is legally considered your full retirement age. Those who request to receive benefits prior to full retirement age will have their monthly benefits permanently reduced. Your full retirement age will depend upon what year you were born. Most workers reach full retirement age at 66 or 67.
Now, you can decide to start receiving benefits early once you reach 62 years of age, but this will reduce the full benefit amount you will receive in most cases. However, it is possible that choosing to do so could actually increase your full benefit amount if you continue working during these years of receiving early benefits. This would be the case if your earnings during these years, starting at 62 and prior to reaching full retirement age, are significantly more than some of your lower earning years which would have been counted towards the 35 years used to calculate your benefit amount. If you did not have a work record for the full 35 available years, meaning you had some zero years, you may want to consider receiving early Social Security benefits while still working.
On the other hand, there is a certain formula that is used to determine how much your benefits will be reduced by taking benefits early. It may or may not make sense to take this option depending upon how much you think you will be earning during the years you are receiving early benefits. It is a good idea to consult a financial professional to determine if this option is right for you.
Delay claiming benefits
Even when you have reached full retirement age you may still want to delay receiving your Social Security benefits. Your payments will increase by 8 percent for each year you delay claiming benefits after reaching full retirement age until you hit 70 years of age.
Spousal payments
Married individuals have the option of receiving Social Security benefits based upon his or her own income record or up to 50 percent of the higher-earning spouse’s benefits. Also, you may be able to claim benefits based on your former spouse’s work record as long as you were married for at least ten years.
Include dependents
If you have children who are dependents under the age of 19 you may have the option of obtaining additional benefits. It is possible to receive up to one and a half times your full Social Security benefit amount. However, you should know that certain annual limits may apply.
Mitigate tax liabilities
You may face some tax consequences if you earn supplemental income after you have started receiving Social Security benefits. There are specific limits to how much you are able to earn before 50 to 80 percent of the benefits will be subject to taxation. Your financial advisor will be able to inform you of the current applicable limits.
Comprehensive retirement planning
Of course, Social Security benefits are just one part of crafting a complete retirement plan that will ensure you are living comfortably during your golden years. You should understand the various financial instruments and strategies available to you in order to make sure you have the best retirement planning possible.
The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of the author and not necessarily those of Raymond James.
Neither Raymond James Financial Services nor any Raymond James Financial Advisor renders advice on tax issues, these matters should be discussed with the appropriate professional.