Social Security might seem like a simple system, but for most people, it’s unknown territory, full of toll roads, burned-out bridges, roundabouts, one-way streets and dead-ends — a scenario that probably makes you want to reach for a road map.
Unfortunately, there is no road map for navigating this confusing system, but you do have resources that can help. To understand and maximize your benefits, get answers to your top Social Security concerns with these tips.
Study Up on Social Security Before You Apply
For many people who don’t give much thought to benefits before it’s time to claim them, Social Security can seem like a dense thicket of regulations. Read up on Social Security rules well before you get to retirement age.
Surf the Social Security website and try out the claiming calculators to figure out what benefits you would receive at different ages. The more you know and the earlier you know it, the less intimidating the procedures will seem.
Watch for Changes in Social Security Laws
Here’s what might be the most important Social Security tip of all: Keep your eye on the ball. Every year, some provisions of Social Security change. For example, the payroll tax earnings cap went up from $137,700 in 2020 to $142,800 in 2021, and it will increase to $147,000 in 2022.
Make Up for Low-Earning Years
The average Social Security benefit in September 2021 is $1,439.07 per month, but some people get a lot more — up to $3,895 if you retire at age 70 in 2021. Benefits are based on your highest 35 years of earnings, which means you can work the system a little.
For example, if your top 35 years include one or two in which you earned very little — such as with a minimum-wage job during college — you can make up for those low-earning years. Just put in a few extra higher-wage years before claiming Social Security benefits.
Work Long Enough To Earn Benefits
The amount of your monthly Social Security retirement benefit depends on how much Social Security tax you pay. The tax rate is 6.2% on earnings up to the applicable taxable maximum amount for both you and your employer. The maximum taxable earnings are $142,800 in 2021 and increases to $147,000 for 2022.
To max out your retirement benefits, that’s the amount of salary you should aim for. You need at least 40 quarters, or 10 years, of Social Security wages to qualify for retirement benefits.
Work Without Reducing Your Benefits
You can keep earning money without reducing your Social Security benefits as long as you play by the rules. You still get full benefits under these circumstances:
- You reach full retirement age, no matter how much you earn.
- You reach full retirement age in 2021 and make $50,520 or less.
- You reach full retirement age after 2021 and earn $18,960 or less.
When you’re under full retirement age and make more than the limits, you lose $1 in benefits for every $2 you earn above the annual limit, according to the SSA. You lose $1 for every $3 you earn above the limit in the year you reach full retirement age, the agency outlined on its website.
Don’t worry too much, said Brannon Lambert, wealth manager with Canvasback Wealth Management. When the Social Security Administration withholds some benefits due to the earnings test, the withheld money is returned to your pool of funds. Your benefits will be re-calculated and increased once you reach full retirement age.
Don’t Depend On Social Security Alone
Social Security benefits help millions of retired Americans stay solvent through their retirement years. But the program was never intended to be the sole income source for retirees.
The Social Security Administration offers the following retirement tip: Don’t try to retire on your Social Security benefit check alone. The benefit replaces about 40%t of the average wage earner’s income, and retirees typically need 70% or more of their pre-retirement income to live comfortably, according to the agency.
Watch For States That Tax Social Security Benefits
As if paying federal tax on your Social Security benefits wasn’t bad enough, some states also tax them. In fact, 13 states tax Social Security: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont and West Virginia. Of course, you’ll have to consider all of a state’s taxes, not just income, to determine whether a state tax system works with your retirement budget.
“If you’re going to move in retirement, consider moving to a state that doesn’t have its own tax on Social Security benefits — the majority of them don’t,” said Rachel L. Sheedy, editor of Kiplinger’s Retirement Report.
Higher Earners Need To Save More
Social Security replaces income progressively. That means lower earners generally receive a higher income replacement rate than higher earners.
Still, most people will need additional sources of retirement income, said Richard Rausser, senior vice president of Pentegra Retirement Services. What you will need depends, in part, on the cost of living in the area where you retire and the level of income you’re accustomed to.
Think Twice Before You Retire Abroad
Many countries have very low costs of living, and your Social Security and retirement checks will go far. But if you have never lived abroad and aren’t fluent in another language, think twice before you opt for the expat life. It’s harder than you might think to adjust to a new country and a new culture, far from your family and friends.
Check out the cheapest countries to live in by doing some research. Then go for an extended visit before you send all your worldly goods across the ocean.
Choose a Community With a Low Cost of Living
You can find great retirement communities in the U.S. where a couple, if not a single individual, will be able to live on Social Security benefits alone. To do your own research, check out statistics on cost of living in cities that interest you. Even if you’re living on fixed income, you’ll still find that some cities are much less expensive than others.
Don’t Expect a Bump-Up at Full Retirement Age
One of the biggest Social Security myths is that if you claim your benefits early, your payment stays lower from 62 until full retirement age, then bumps up to a higher amount. The truth is, a retiree will receive the same monthly benefit, increased only by the cost of living adjustment, throughout retirement.
In general, you decide whether to take a lower benefit earlier or a higher benefit later. The automatic bump-up myth represents a misunderstanding of how the system works.
Pin Down Your Full Retirement Age
You’ll get higher Social Security benefits if you wait until full retirement age to retire, so pin down exactly when that is. If you were born between 1943 and 1954, you can receive full retirement benefits at age 66; however, you can start to receive benefits as early as 62. If you claim your Social Security benefits before full retirement age, you’ll get a portion of your benefits but not the full amount.
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Carefully Consider the Best Time To Claim
Don’t just collect Social Security benefits as early as you can, said Rausser. You can shortchange yourself if you jump in without careful thought and analysis.
“The optimal Social Security benefit commencement age varies widely for each individual and each couple,” Rausser said. “The variables that need to be factored into the equation include marital status, level of earnings, availability and amount of other retirement income sources, age, health status and cost of living in retirement.”
Claim Early If You’re in Poor Health
Delaying benefits means larger benefits, but only if you live long enough to collect them. For example, if you’re 62 years old and in very poor health, consider claiming your benefits immediately and don’t be seduced by the financial incentives of waiting.
Delay Benefits If You’re in Good Health
The earliest age at which you can retire is 62, at least four years before your full retirement age depending on when you were born. But you’ll pay the price for early retirement in the form of a reduced benefit amount.
For example, if your full retirement age is 67 but you retire at age 62, you’ll get only 70% of your full benefit.
Hold Off on Benefits To Earn More
Early retirement cuts your benefits, but late retirement increases them. Consider waiting until a few years after your full retirement age to start drawing Social Security benefits. For each year you delay — up to age 70 — your benefit goes up by 8%.
That means if your full retirement age is 66 and you delay getting benefits until age 70, your benefit amount will be 32% higher. For example, if you would receive $2,000 a month at age 66, waiting until age 70 would equal a 32% increase, which is an additional $640 a month.
Suspend Benefits Until Age 70
Another strategy for people who regret claiming benefits before age 70 is to suspend them. Benefit suspension is only possible for people who:
- Are receiving benefits
- Are already at full retirement age, and
- Are not yet 70 years old
Benefit suspension is not applied retroactively; it starts with the payment the month after you suspend. You can earn the 8% per year increase for each suspended year up to age 70 — then your benefits will begin again automatically.
Get Help From an Expert
Consider consulting with an expert if you’re agonizing about the best course of action to take when it comes to Social Security. The best advice for someone who is uncertain is to seek help from an advisor or specialist, Rausser said. Such experts can guide you through the many choices available and help you come up with the best strategy for collecting Social Security benefits.
See If You Qualify For ‘Restricted Application’ Claims
This rule used to let you apply for your spousal benefit while allowing your individual benefit to grow until you reach 70 years old. At that point, you could switch over and claim your higher individual benefit.
The restricted application rule was largely phased out, but you can still take advantage of this strategy if you are collecting survivor’s benefits as a widow or widower. In that case, you can collect your survivor benefit independently of your retirement benefit.
You can also use this strategy if you receive spousal benefits and you’re entitled to disability, or you receive spousal benefits because you’re caring for the retired worker’s child, the Social Security Administration notes.
Coordinate Benefits With Your Spouse
When both you and your spouse are eligible for Social Security, be sure to come up with a strategy that works for both of you. This depends on your other retirement assets and whether one or both of you are currently working. One strategy for a couple with Social Security benefits is to take the smaller benefit early and delay the larger benefit. This maximizes your combined benefits and allows you to still get some monthly income earlier.
Claim Social Security Benefits as a Spouse
You qualify for Social Security benefits once you earn Social Security wages for 10 years. But if you’re married to a high earner — or, in some cases, were married to one for at least 10 years but are now divorced — you might be better off claiming as a spouse.
Your Social Security benefits will be half of whatever your spouse gets if you claim at full retirement age. Claiming a spousal benefit before you reach full retirement age will result in a reduction of benefits.
Claim Benefits as a Surviving Spouse
You can claim a survivor benefit when you are 60 years old if your spouse dies before you do. Consider waiting to claim Social Security benefits until you reach full retirement age if you can, though. Waiting will allow you to receive 100% of what your spouse would have received.
Delay the Higher Earner’s Benefits Until 70
High earners might want to wait until age 70 to take their benefits, particularly if they’re married, Sheedy said.
“By waiting until age 70, you earn 8% a year in delayed retirement credits for every year you wait to claim benefits past full retirement age,” she said. “If you can’t wait until age 70, the longer you can wait, the bigger your benefit will be.”
Maximize Potential Survivor Benefits
The strategy of delaying the higher earner’s benefits until 70 is particularly helpful in maximizing benefits to the survivor, said Sheedy. In the case of married couples, one spouse will probably outlive the other. Delaying the higher benefit and allowing it to grow as much as possible can help it last the lifetime of both spouses.
When the lower earner dies first, the higher-earning spouse retains the bigger benefit. When the higher-earning spouse dies first, the surviving spouse will be entitled to a survivor benefit equal to the higher earner’s benefit.
Claim Benefits as a Divorced Spouse
You might be able to get Social Security benefits as an ex-spouse if you’re divorced and haven’t re-married. Even if your former spouse is re-married, you can still claim spousal benefits based on your ex’s work history if your marriage lasted a decade or longer.
It’s possible to claim spousal benefits at age 62, but consider waiting until full retirement age if you can. The payoff: You’ll get a full 50% of whatever your ex-spouse receives. Remarriage on your part nixes this strategy, but a second divorce or an annulment reopens it as a possibility.
Don’t Let Your Ex-Spouse Thwart Your Benefits
Ex-spouses can cause havoc in many areas of your life, but they have no voice in your Social Security benefits — so don’t let them tell you otherwise. You can claim benefits as an ex-spouse if you meet the qualifications.
You don’t have to negotiate with or even tell your spouse. Simply show the papers to prove to the Social Security Administration that you were married for 10 years or more.
Change Your Mind About Claiming — Only Once
Take all the time you need to decide whether you want to file for benefits now or wait for larger benefits later. Once you decide to tap into your benefits, it’s not that easy to turn the tap off again. The current Social Security rules allow you to change your mind once if you:
- Are eligible for benefits
- Apply for benefits, then change your mind and want to withdraw the application, and
- File a request giving the reason for change within 12 months of becoming eligible for retirement benefits.
You’ll have to repay all the money you and others received under the original claim. You can only withdraw an application once in your lifetime.
Work To Boost Future Benefits
If you can, keep working for a few years after you reach full retirement age, and those years can count toward your top 35 wage-earning years, according to Lambert. Any and all earnings subject to the Federal Insurance Contributions Act taxes can count toward calculating your retirement benefit.
For example, say you’re 68 years old, collecting Social Security benefits, and are working and earning good money. The agency will re-calculate your benefits and make adjustments accordingly if those earnings happen to constitute one of your highest 35 years of earnings.
Self-Employed Individuals Pay Full Tax Rates
When you’re an employee, you and your employer each pay 6.2% of your wages in Social Security tax, which adds up to a total contribution of 12.4%. However, if you’re self-employed, you’re both the employer and the employee, so you’re responsible for the entire 12.4% tax yourself. On the bright side, self-employed taxpayers get a tax deduction equal to the employer portion of the Social Security tax on their federal income taxes.
Know How Much of Your Benefits Can Be Taxed
Social Security benefits were not subject to federal income tax until 1984. At that point, Congress changed the law and made a portion of benefits taxable if a recipient makes a certain amount of income from other sources.
Here’s how to figure out the portion of your Social Security benefits subject to tax:
- First, add up all of your income other than Social Security.
- Then, add half of your Social Security benefits for the year to your additional income.
You could pay tax on up to 50% of your benefits if you file your tax return as an individual with combined income between $25,000 and $34,000. You could pay tax on up to 85% of your benefits if your combined income is over $34,000 if you’re filing single or $44,000 for joint filers.
Consider Taxes When Scheduling Other Retirement Funds
You can’t get rid of the federal tax rules that apply to your Social Security benefits, but you can manage the rest of your retirement assets in a way that avoids or reduces the tax. Here are a few things to keep in mind:
- Taxable IRA and 401(k) distributions count as income to push more Social Security benefits into the taxable category. Try to avoid taking these before you reach full retirement age.
- Roth IRA and Roth 401(k) accounts do not add to your income. Tap into these before you reach full retirement age.
- It’s better to avoid withdrawing from retirement accounts if you’re still working. The combination of wages plus IRA income will push you over the limit faster.
- Take IRA distributions earlier than needed only if you haven’t reached the income threshold that year.
Expats Should Watch For Foreign Tax Codes
Some retirees seek adventure or lower costs of living and become expats. Check out the tax system your new country of residence has in place — it might tax your benefits.
Many foreign nations impose taxes on Social Security benefits of expats in residence there, according to the Social Security Administration. Before you commit to moving, contact that country’s embassy in Washington, D.C., for information.
Don’t Expect Big COLA Increases in Your Benefits
You might think that Social Security recipients are safe from price hikes because of the annual cost of living adjustment. But that isn’t exactly true. The COLA is based on an inflation measure called the Consumer Price Index for Urban Wage Earners and Clerical Workers.
This measure doesn’t necessarily incorporate costs that hit you hard, like out-of-pocket healthcare costs. Also note that the COLA for 2021 was 1.3%. The COLA for 2022 will be 5.9%, the largest increase in several decades.
But Get a Bigger Check With Compounded COLA Benefits
You’ll get compounded COLAs if you delay receiving benefits past your full retirement age. For example, if you wait until age 70 to seek benefits, you would get eight years of compounded COLAs based on the full retirement age benefit.
Learn To Speak Medicare
Medicare and Social Security are separate programs, but you should think of them as the intertwining roots of your retirement. Study Medicare provisions until you have the basics down and understand how they intersect with Social Security.
Consider arranging to have your Medicare premiums deducted directly from your Social Security benefits rather than paying out of pocket, said Lambert. The Medicare “hold harmless” provision only applies to recipients who have their premiums deducted directly from their Social Security checks. The provision states that annual increases in Medicare Part B premiums cannot exceed the COLA adjustment for those recipients.
Know That the Social Security Trust Fund Reserve Is Going Broke
Social Security benefits are paid from the Social Security trust fund, which is funded by Social Security taxes. By 2034, those incoming taxes will be enough to pay for only 74% of scheduled benefits, according to the Social Security Board of Trustees.
The cause of the problem is an aging population with birth rates falling. This makes it likely that some adjustments to taxes or benefits will be enacted to restore solvency for the Social Security program.
Realize Younger Workers Should Expect Changes
Experts are just as much in the dark as you are about possible changes to the Social Security program. David Peterson, formerly a managing director at United Capital, guessed that any changes would most likely focus on younger people entering the workforce, though.
“If there are changes, I suspect they would affect younger Americans, such as perhaps delaying the age at which someone currently 45 years old could collect benefits,” he said.
Bet Against Changes Impacting Retirees
Peterson said that older Americans probably have less to worry about with legislative changes to Social Security benefits. “Historically, Congress has never made any changes to Social Security that impacted anyone even close to approaching retirement,” he said.
This makes sense because it’s important to have enough time to plan for your future. People nearing the age where they can receive Social Security Benefits likely would not have sufficient time to adjust their retirement plan. Younger people, however, can make changes to their lifestyles to help offset the negative impacts of any change to Social Security.
Expect the Social Security Administration To Help You
Although you might have some challenging decisions to make, applying for and starting your Social Security benefits should not be a daunting process. The agency is experienced at processing applications.
“The Social Security Administration is very adept at getting recipients their entitled benefits,” Peterson said. “It’s important to note that the Social Security Administration is not the Internal Revenue Service. The administration’s purpose is to help Americans collect benefits.”
Don’t View Social Security in Isolation
Social Security should be just one part of your retirement plan. Peterson suggests looking at Social Security as one piece of a pie that includes pensions, 401(k) plans and individual savings. Making decisions about Social Security benefits without the other aspects of retirement in mind might be a decision you will eventually regret.
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Last updated: Oct. 29, 2021