Social Security benefits are the main source of income for many retirees. Deciding when to take these benefits however could severely impact your retirement.
When combined with savings from a 401(k) and IRA account, Social Security benefits could help you retire how you planned. So, if you’re approaching retirement, now is a good time to learn how to maximize your benefits.
Social Security 101
Social Security retirement benefits provide eligible workers, as well as their spouses, survivors and dependent children with monthly income. While Social Security benefits were never meant to replace all of your earnings, it serves as the base of retirement income for many older retired workers.
Many non-retirees downplay the importance of Social Security because of its precarious financial condition and other factors. However, surveys of U.S retirees show that the program’s benefits are an important part of retirement income for most of them, and the importance grows through retirement.
A Slow-Moving Crisis
According to the 2020 annual report of the Social Security Board of Trustees, the surplus in the trust funds that disburse retirement, disability and other Social Security benefits will be depleted by 2035.
This does not mean Social Security will no longer be around in 20135, it means the system will exhaust its cash reserves and will be able to pay out only what it takes in year-to-year in Social Security taxes. If this comes to pass, Social Security would be able to pay about 79% of the benefits to which retired and disabled workers are entitled.
The coronavirus pandemic could also have a significant impact on the system’s long-term finances, as large-scale job losses cut into the payroll tax revenue that largely funds Social Security.
Social Security Changes in 2021
New Social Security changes took effect on January 1st 2021. According to the SSA’s annual fact sheet, these changes are as follows:
- Social Security recipients got a 1.3% raise for 2021, compared with the 1.6% hike beneficiaries received in 2020.
- Maximum earnings subject to the Social Security tax also increased—from $137,700 a year to $142,800.
- Other changes for 2021 included an increase in how much money working Social Security recipients can earn before their benefits are reduced and a slight rise in disability benefits.
- Social Security tax rates remain the same for 2021—6.2% on employees and 12.4% on the self-employed.
- It now takes $1,470 to earn a single Social Security credit, up $60 from 2020.
Maximizing Your Benefits
Now we have a better understanding of Social Security, here are six strategies that could help boost your household’s benefits.
- Use a Financial Calculator to get Started
For many, Social Security is the most important part of our retirement picture, and deciding when to claim is a big decision. The amount of your benefits will depend on your average income over your working years, your spouse’s average income and the age at which you claim benefits.
A great place to figure out these numbers is by utilizing a financial calculator specifically designed for SS Benefits. According to SSA.Gov, benefit estimates depend on your date of birth and on your earnings history. For security, the “Quick Calculator” does not access your earnings record; instead, it will estimate your earnings based on information you provide. So benefit estimates made by the Quick Calculator are rough.
Although the “Quick Calculator” makes an initial assumption about your past earnings, you will have the opportunity to change the assumed earnings. The results will help you decide when to claim and show you how to maximize your benefits.
- Claim at the Right Time
Knowing when to claim Social Security benefits could have a huge impact on your retirement income. While you can start collecting Social Security payments at age 62, you would only receive your 75% of the amount you’re eligible for. You have to wait until you reach full retirement age to receive the full Social Security benefit you’re eligible to receive.
On the flipside, you can continue to increase your benefit amount by delaying benefits beyond your full retirement age. If you wait until age 70 to start taking Social Security, you will receive 132% of your regular benefit amount. If you regret your claiming decision – if you’re within the first 12 months of claiming and you have enough cash available – you can withdraw your application and repay all the benefits you’ve received so far.
- Estimate Your Longevity
The most effective Social Security claiming strategy for you depends on how long you will live. If you have a major health problem, it can make sense to claim benefits as soon as possible (unless you want to leave a higher benefit to a surviving spouse). If you’re healthy and have parents who lived into their 90s, there’s a case to be made for delaying claiming your benefit in order to receive a higher Social Security payment in your 70s, 80s and beyond.
- Maximize Household Benefits
If you have a spouse or minor children, you should consider how your claiming strategy affects them. Spouses (and ex-spouses) that were married for at least 10 years are eligible to claim not only their own benefits, but spousal benefits too. Claiming spousal benefits means getting 50% of your partner/ex-partner’s annual payout.
To make the most of these payments, first determine which spouse will earn a larger benefit. The lower-earning spouse can start claiming Social Security at an earlier age, while the higher-earning spouse’s benefit amount continues to grow. Once the higher-earning spouse reaches 70, the couple can switch to filing against that person’s earnings history.
The dependent child benefit is equal to half of the claiming parent’s full retirement benefit, even if the parent claims early. Factors that affect this decision include the number of children who are in the household and how long it will be until they turn 18 (or 19, if they’re full-time students).
- Maximize Social Security Survivor Benefits
When one member of a retired married couple passes away, the surviving spouse can inherit the deceased spouse’s Social Security payment if that amount is higher than his or her current monthly payment. Married couples can increase the Social Security benefit the surviving spouse will receive by having the higher earner delay claiming Social Security.
Furthermore, a one-time death payment of $255 can also be claimed by a widow or widower if he or she was living with the deceased or receiving Social Security benefits on the deceased’s record.
- Help Minimize Income Taxes on Benefits
Retirees with low incomes or whose only source of income is Social Security generally don’t pay income tax on their Social Security benefit. The average Social Security payment to retired workers was $1,547 in January 2021, or $18,564 for the year, which is considerably below the taxable threshold of $25,000 for an individual.
However, some 40% of Social Security beneficiaries have to pay federal income tax on part of their benefit, according to the Social Security Administration. The income cutoffs for Social Security taxes are not adjusted for inflation each year, so more retirees will need to pay tax on their Social Security payments over time.
To reduce or avoid taxes on your Social Security benefit try the following tactics:
- Stay below the taxable thresholds.
- Manage your other retirement income sources.
- Consider taking IRA withdrawals before signing up for Social Security.
- Save in a Roth IRA.
- Factor in state taxes.
- Set up Social Security tax withholding.
Consider each of these strategies to help minimize taxes on your Social Security payments.
Protect Your Retirement With the Right Strategy
Developing a smart Social Security strategy is just one aspect of effective financial planning. Curating a comprehensive financial strategy with an advisor who’s savvy in Social Security can offer guidance to help you make the most of your benefits.
At Johnson Wealth and Income Management, we recognize that understanding how to maximize your social security benefits is key to unlocking the potential of this critical retirement component. What’s more, our commitment is to help you work towards achieving your financial goals and to help provide you with a “worry free” retirement.
Contact us here today to learn about choices on your retirement income plans and options.
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