The average social security benefit for a retiree is about $ 1,543 per month. However, this is not a universal benefit. Your social benefit is adjusted based on your personal earnings history and the age at which you claim benefits. This formula approach helps to improve the fairness of the program by tying at least something to what you get in the form of taxes.
It also means that you have some influence on how big your personal check for social security becomes. These five secrets of social security can help you get even bigger checks than you would otherwise. Before using it, it is important to realize that it all compromises between things like time, money and effort. If you decide that it is not worth doing what is necessary to get the bigger check for social security, it is your choice. Just be sure you have another source of income to cover your expenses.
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1. Wait a few years to collect benefits
You can claim your Social Security retirement benefits at any time on or after you turn 62. The longer you wait between your 62nd and your 70th, the bigger your monthly check will be. How much bigger? It depends in part on what year you were born, but the concept is generally the same no matter what happens that year.
If you were born in 1960 or later, your full retirement age is 67. If you take Social Security at 62, your monthly check will decrease by 30% than you would get at full retirement age. On the other hand: if you take social security at age 70, your monthly benefit will increase by 24% than you would get at full retirement age. So if your full retirement age were $ 2,000 a month, you would get $ 1,400 a month if you started at age 62 or $ 2,480 a month by starting at age 70.
The compromise you have to deal with is that you make longer money by starting younger. As a result, you should consider deciding what is worth more to you, earning money sooner if you are more likely to use it, or getting more money each month.
2. Work more years
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Your social benefit is based on your highest income of 35 years, indexed based on national average wage levels during those years. If you have worked for less than 35 years, some of those years will be entered as an income of $ 0 in the calculation of your benefit amount. On the other hand, if your salary has increased over time so that you earn more at the end of your career than at the beginning, then you can replace years with low earnings with higher ones.
There are some important compromises with this choice. First, the social security benefit formula contains ‘bending points’ which means that the low-income years are worth proportionately to the higher-income years. This means that your benefit will not increase as much as you hoped, if you replace a $ 10,000 income year with a $ 80,000 income year.
Secondly, it means that you work for more years more years of work. If you love your job and expect a long and healthy retirement, feel free to do so. If this is not the case then maybe you should seriously consider asking yourself if you would like to work for a few extra dollars a month.
Earn more money every year
The higher your income, the higher the benefit of the social security you build up based on that year’s income, to an annual limit. In 2021, the limit is $ 142,800. So if your income is below that amount, you can set a higher benefit by increasing your income. Unfortunately, it also involves deliberations.
For one, the same issue of inflection points applies here – the higher your income, the less incremental benefit you derive from it. For another, most of us earn more by taking on another job, which means more hours of work.
Another thing to keep in mind is that there is a lot of “side-noise” these days about being an independent contractor. It requires you to pay both the employer and the employee side of the social security tax, which makes it more expensive than drawing a fixed salary from your employer.
4. Get your retirement savings in a Roth IRA
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Up to 85% of your social security income may be taxable, depending on your tax return status and your total income level. The income considered in the calculation otherwise includes tax-free income, such as the interest you will receive on tax-free municipal bonds.
Under current rules, qualifying for retirement from a Roth IRA is one of the few sources of cash that your social security is not subject to tax. So if you can get the most money you plan to use for your retirement within a Roth IRA before you start collecting social security, you can increase the net amount of your check that you can keep.
The compromise there is that you have to start with the plan decades in advance by saving in a Roth 401 (k) and / or Roth IRA, or you need to convert your money from a traditional plan to a Roth plan. The advantage of Roth-style plans is that you get tax-free withdrawals during your retirement, but the downside is that you pay tax on the money you put into the plans. This means your contributions or your conversions are taxable income in the year you do them. You may find that the upfront costs later on are not worth the boost for your Social Security check.
5. Get a one-time boost for your benefit check
Once you are past your full retirement age, at the time you claim benefits, you can ask Social Security to repay you retrospectively for up to six months. The retrospective claim will give you a one-time boost, but it comes with a compromise.
The compromise is that it is not free money, but it is treated as if you had claimed benefits six months before. Since your payout amount is based on the age at which you claim, you will cost the increase of this boost for the rest of your life in the form of smaller monthly checks.
After all, there can be good reasons to take this step. For example, if you pass your 70th birthday without claiming your benefit, you can return the six-month money back window that you would otherwise permanently miss.
If you are packing Roth IRA conversions of your retirement money, you want to do the same not start with social security while still doing the conversions to keep your total tax burden. Postponing social security until the beginning of next year and claiming the benefits retroactively could potentially make sense in that scenario.
Plan for Social Security as Part of Your Total Retirement Plan
Regardless of what you expect your social security benefit to be, the chances are high that on its own it will not be sufficient to cover the costs you will incur at retirement. While you can use these five secrets to get a bigger check, you should also focus on building enough of a nest egg to make sure the costs that social security does not entail.
This way, you can spend less time worrying about the compromises you are making to get the bigger social security test and plan more time for ways to enjoy your retirement. When all is said and done, your career has strived to reach that time in your life, and the more you can focus on enjoying your retirement, the better.