Carol McAtee & Associates, CPAS
How to Maximize Your Social Security Benefit
Social Security is likely to be one of your most important sources of retirement income.
Tom Sightings, a popular baby boomer blogger and free-lance writer on topics covering health, finance and retirement, wrote in the March 3rd edition of News Week on-line, that “The rules for collecting Social Security are incredibly complicated. They depend on how long you worked, where you worked, when you retire and whether you’re married, widowed, divorced or remarried. And, who knows when Social Security might undergo some kind of “reform” which may cut benefits, tax benefits or delay benefits. But nothing significant is likely to change in the short term. So, in the meantime, here are six solid strategies to boost your benefits.
1. Work a long time. Social Security calculates your benefit by figuring “your average indexed monthly earnings during the 35 years in which you earned the most.” So, obviously, one way to maximize your benefit is to work for at least 35 years. Maybe that seems like a long time, but look at it this way: If you retire at full retirement age (66 for most baby boomers), you can still get the maximum benefit even if you didn’t start your career until you were 31. Or, if you began working at age 21, and then took off 10 years to raise children, you can still qualify for the maximum if you retire at 66.
2. Have a good job. Social Security sets a maximum amount of salary that is subject to the payroll tax, currently $118,500 per year, which is the same amount of earnings it will credit toward your benefit. The way to maximize your benefit is to earn the maximum income set by Social Security throughout your career. Of course, that’s easier said than done. But don’t forget, this amount has been adjusted for inflation. If you were earning at least $51,300, the maximum amount in 1990, and $76,200, the maximum amount in 2000, you may still qualify for the maximum benefit from Social Security.
3. Don’t retire early. Workers are eligible to start taking Social Security benefits at age 62, but the amount you receive is discounted by about 25 percent. Conversely, if you work beyond full retirement age, you receive a bonus of approximately 8 percent a year, up to age 70. There’s no extra benefit to working past age 70. Also consider this: If you start collecting Social Security before full retirement age, and you’re still working and earning more than $15,720 per year, the government starts slicing your benefits. For every $2 you earn over the $15,720 limit, $1 is temporarily withheld from your benefits.
4. Don’t have too much income in retirement. If you’re married and file a joint tax return, your Social Security benefits are not taxed if your combined income falls below $32,000. If your income falls between $32,000 and $44,000, as much as half is taxed, and if your income is over $44,000, then 85 percent of your Social Security is subject to federal income tax. So if you had a good career and didn’t retire early, you’ll likely be subject to the 85 percent rule. But there is one way around it: don’t get married. Two singles can earn up to $25,000 each, or a combined $50,000, before their benefits are subject to federal tax.
5. Live in a tax-friendly state. There’s not much you can do to avoid federal taxes unless you take a vow of poverty. But you can do something about state tax. Most states do not levy income tax on Social Security benefits, including retirement havens like Florida, Arizona and the Carolinas. But about a dozen states do exact income tax on your Social Security benefits, including red states like Kansas and Utah as well as blue states like Connecticut and Vermont.
6. Stay in good health. By far the most important factor in how much you collect from Social Security is not how much you earned, but how long you stay alive to collect benefits. You can work all your life, but if you die the day after you retire, all is lost. So it literally does “pay” to eat right, get some exercise, sign up for an annual checkup and in every other way take care of yourself so you can continue to collect that monthly benefit throughout a long and prosperous retirement.
Tom Sightings blogs at Sightings at 60.
If you have any questions about this topic or other tax related questions, please do not hesitate to contact us at 727-327-1999.
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