When Social Security was introduced in 1935, its intent was not to be the primary source of income for retirees, but rather a safety net for people who were unable to accumulate sufficient retirement savings. In fact, in those days, very few Americans gave much thought to their Social Security because of shorter lifespans and reliance of guaranteed pensions.
Today, things are different. An increasing number of people are paying attention to their benefits, and Social Security planning is becoming a vital element in securing adequate income during retirement. For this reason, it is critical to plan and make the most from your Social Security benefits. The financial advisors at Maggi Financial Group explain how you can do just that.
Social Security as an Annuity
“Given today’s longevity, it is more important than ever to maximize your Social Security benefits. Think of it as an annuity for your lifetime.” – Charlotte Dougherty, Dougherty & Associates
Although there are plenty of strategies to maximize Social Security benefits, they can be complex and apply only to certain people. The following planning tips apply to everyone who is set to receive Social Security benefits.
Work at Least the Full 35 Years. The Social Security Administration (SSA) calculates your benefit amount based on your lifetime earnings, more specifically the average of your 35 highest-earning years. This dollar amount is calculated by the average indexed monthly earnings (AIME) formula. It is important to note that any year without pay (due to voluntary unemployment or lay-offs) is counted as a zero-dollar amount and will bring down your average earnings. To max out your benefits, you want to have at least 35 years of earned income calculated into this amount.
Max Out Earnings Through Full Retirement Age. Because the SSA calculates your benefit based on your earnings, the more you earn, the higher your benefit amount will be. With that in mind, think twice about semi-retiring or scaling back on work during your pre-retirement years! Those lower-earning years will be calculated into your Social Security benefits! You want to earn as much as you can right up until FRA (and after!) to max out your benefit.
Delay Benefits. Today, the full retirement age (FRA) – the age at which people can receive their full Social Security benefits – is 66 years old. However, few people realize that if they delay their Social Security benefits, they can effectively earn an 8% annual return on their available benefits through the age of 70. For example, if you were to receive $24,000 annually at your FRA, but chose to wait until age 70, your benefits would increase to $31,680. In cumulative terms, by your life expectancy age of 82, you would increase your benefits from $378,000 to $411,000!
Claim Spousal Benefits and Delay Yours. If you and your spouse were born before January 2, 1954, and have both reached FRA, you can claim spousal benefits and let your own benefits keep growing. Then, when you reach the age of 70, you can switch to your higher benefit.
Avoid Social Security Tax. If you are at a certain income level after you begin receiving Social Security, anywhere from 50% to 85% of your benefit payment can be subject to federal taxes. Fortunately, there are ways you can avoid paying this tax, a couple of which include:
- Spreading out your income from various sources to prevent an increase in income that could trigger a higher tax.
- Taking a “tax honeymoon” period between retirement and 72 years old. During this time, you will not have any earned income, nor are you required to withdraw from your IRAs yet. With a nonqualified account, you can withdraw tax-free principal and most likely, your Social Security benefits will be tax-free.
Plan for your retirement with Maggi Financial Group!
Navigating through Social Security income can be complicated, but there are strategies to maximize your benefits. This is where a knowledgeable financial advisor, such as Maggi Financial Group, can help! To learn more about our retirement and financial planning services or to schedule a meeting, please call us today at (813) 850-0131.