How to Maximize Social Security Benefits – Withdrawal Options & Benefits
As pensions become increasingly rare – replaced by defined contribution plans, which are subject to the volatility of financial markets – the importance of Social Security continues to grow. In fact, the Securities Industry and Financial Markets Association claims that Social Security is now the “most prevalent and important single source of income for retirees.”
Generally speaking, the amount of Social Security you receive is based upon your total lifetime earnings that were subject to Social Security taxes – as of 2014, maximum taxable earnings stand at $117,000 per year. In other words, the more money you make over an extended period, the more you receive when you begin withdrawing.
The specific dollar benefit paid to a beneficiary is the result of an SSA calculation, based upon that person’s top 35 years of earnings, adjusted for inflation. It is further affected by the age at which you begin receiving benefits. In 2014, according to the Social Security Administration, the maximum payment for an individual who begins claiming at full retirement age is $2,642 per month.
For help estimating your future benefits – as well as verifying your earnings each year – the SSA provides a useful online resource. Many of the criteria that determine the amount you receive, however, are actually within your control.
There are several options for when you can start withdrawing your Social Security benefits.
The original Social Security program established a normal retirement age of 65, at which people could begin receiving benefits. In 1983, Congress passed Social Security amendments to gradually raise that age to 67, depending upon one’s birthday – anyone born in or after 1960 must reach that age before collecting full benefits.
The program offers an early retirement withdrawal option beginning the month after turning 62, provided that you have a minimum of 40 credits of work – in 2014, one credit is earned for each $1,200 of earnings annually, up to four credits per year. The dollar amount each credit is worth adjusts annually based on average earning levels.
If you choose to withdraw early, your benefit amount is reduced according to the following parameters:
Some people elect to receive Social Security payments prior to their regular retirement age, but that may result in a reduction of benefits in the months they continue to work:
If your payments are reduced due to earned income prior to regular retirement age, the Social Security Administration recalculates your benefit amount at your regular retirement age, leaving out those months where excess earnings were previously deducted. As a consequence of this recalculation, you may recapture the deducted amounts in the form of a higher monthly benefit over the remainder of your life. Nevertheless, people who anticipate working until their regular retirement age and earning significantly more than $15,480 during those working years should rarely consider taking Social Security benefits early.
Just as some people elect to take Social Security benefits early, others decide to delay payments past their regular retirement years. For each month that you hold off beyond your regular retirement age, your monthly benefit increases one-twelfth of 8% (0.0067). For example, if you were born in 1943 or later and delay a $1,000 monthly payment for three years, your benefit would increase to $1,241: $1,000 + ($1,000 x 36 x 0.0067).
If you and your spouse have taxable income of more than $34,000, one-half of your Social Security benefit is subject to taxation. If your earnings are greater than $44,000, 85% of your benefit is subject to taxation. For this reason, it’s best to delay taking Social Security benefits until you stop working and your taxable income reduces, thereby reducing the amount your Social Security benefits are taxed.
Since calculating these taxes is a complicated task, IRS Publication 915 has instructions and worksheets that can make the process easier.
To maximize the total benefit paid over the course of your life, deciding when to begin Social Security payments should follow a careful analysis of the following data:
You may want to consider transferring your traditional retirement accounts into equivalent Roth accounts. There’s no penalty for doing so, but you are required to pay income tax on the transferred funds. The benefit of the Roth is that withdrawals are not taxed – which may eliminate the eventual tax bite on your Social Security payments. Before taking steps toward conversion, seek competent tax advice to see if it can minimize your future tax burden, as well as the taxes you would owe in the year of the conversion.
Married couples have additional options, whether both spouses work or only one does.
According to the Social Security Administration, you are entitled to receive 50% of your spouse’s benefit (at regular retirement age) for as long as your spouse lives. If Bill is entitled to receive $1,000 per month at age 66, his spouse, Mary, is entitled a benefit of $500, even if she has never worked or paid Social Security taxes. Mary can begin receiving payments as early as age 62 (subject to the same dollar deductions for early withdrawal). The couple’s combined income would be $1,500 monthly: $1,000 for Bill + $500 for Mary.
Spouses are eligible for their payments even if the primary earners delay their own benefits – as long as the primary earner applies for Social Security. For example, Bill at age 66 (his regular retirement age) could apply for Social Security, but defer his own benefit. At the same time, however, Mary can elect to take her spousal benefit ($500 per month at her regular retirement age). When Bill reaches age 70, because he deferred his benefit, it increased. He receives a $1,240 monthly benefit while Mary continues to receive $500.
When both partners are entitled to Social Security payments, it is possible to maximize total benefits under the little-known “restricted application for spousal benefits.” The process consists of applying for a spousal benefit for one partner while delaying benefits for the other.
Restricted application in some cases can significantly increase the total Social Security benefits received by both partners. Consider the following examples:
There is no universally optimum time to begin taking benefits. These decisions should be considered along with analysis of other retirement benefits, the gender, health, and ages of the beneficiary and spouse, and the possibility of changes to Social Security rules and income tax code. Unfortunately, many retirees overlook the various options and strategies within their control and consequently fail to maximize their benefits.
If you’re not sure what your best route is, seek the advice of a qualified tax and benefit counselor. The right strategy can add thousands of dollars to your retirement security.
The Social Security program has been the subject of increasing political discussion over the past several years as the economy has failed to improve in certain areas and the national debt continues to climb. Since the costs of Social Security and Medicare account for a growing percentage of federal expenditures, it is possible (if not likely) that the programs will end up undergoing significant modifications.
In 2012, the American Association of Retired Persons (AARP) listed a number of potential changes, including the following:
Additional modifications to Social Security – proposed by conservative politicians – include the addition of equity funds as an investment option and the total privatization of the Social Security program. Despite the lack of significant change to Social Security in recent years, there is widespread agreement among politicians on both sides of the aisle that the existing system is broken. Without modification, it’s unlikely that future beneficiaries will have the same financial security as their parents. As a consequence, the questions about Social Security are not whether it will change, but when and how.
While the combination of multiple international and domestic crises and virtual deadlock between political parties make any near-term Social Security reforms unlikely, current and future beneficiaries should monitor any proposal that has the potential to change the program – and the benefits they are likely to receive upon retirement. Understanding your options and staying abreast of looming modifications can help you maximize the benefits you get both now and in the future.
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Michael R. Lewis is a retired corporate executive and entrepreneur. During his 40+ year career, Lewis created and sold ten different companies ranging from oil exploration to healthcare software. He has also been a Registered Investment Adviser with the SEC, a Principal of one of the larger management consulting firms in the country, and a Senior Vice President of the largest not-for-profit health insurer in the United States. Mike’s articles on personal investments, business management, and the economy are available on several online publications. He’s a father and grandfather, who also writes non-fiction and biographical pieces about growing up in the plains of West Texas – including The Storm.
How to Maximize Social Security Benefits – Withdrawal Options & Benefits
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