Figuring out how much money to save for retirement can be very difficult. A common issue that you might encounter is how to account for other revenue streams.
One primary source of income for retirees is Social Security, but it can be difficult to know exactly how much this benefit will be. The calculation determining the benefit depends on several factors, including money earned throughout your career, the number of years you worked, and your age of retirement. Understanding the many different factors that go into a Social Security calculation can help you maximize the money you get from the government. Doing this is important since the benefit will last the remainder of your life and grows over time to account for inflation. Some tips to know about maximizing your Social Security retirement income include the following:
1. Keep track of annual earnings.
The federal government uses annual income to calculate Social Security benefits. The calculation is not based on your entire career, but rather the 35 years with the highest income. If you worked for more than 35 years, only those with the highest recorded income count.
If you worked less than 35 years, then some zeros will be averaged into the calculation, which can significantly bring down the total. Keeping track of your annual earnings can help you know when it is the right time to retire. Often, it makes the most sense to keep working for a couple of years to get rid of potential zeros or cancel out the early years in which you earned less.
2. Delay payments as long as possible.
You can start collecting Social Security once you turn 62, but the payment received at this age will be only 75 percent of the amount for which you are eligible. Each additional year, until you reach full retirement age, increases the total benefit. You will get the whole benefit at full retirement age, which depends on the year you were born.
Even so, you should continue to wait, if possible, as your monthly payments will continue to increase until you reach age 70. At this point, the monthly benefit is 132 percent of the eligibility amount. After 70, there is no point in delaying payments as the benefit will no longer grow. Individuals between full retirement age and 70 can suspend payments to boost their ultimate income.
3. Stay ahead of potential tax liability.
Often, retirees assume that their Social Security benefits do not get taxed since the money comes from the taxes they already paid. However, they may end up owing money depending on their circumstances.
Retirement income level and tax filing status dictate the degree of taxation, but you could be liable for taxes on up to 85 percent of the payment. For retirees, the government considers employment earnings, Social Security benefits, and interest from investments as income, so it is important to keep track of the totals and plan for taxes.
4. Be strategic with the spousal benefit.
Individuals who have been married for at least 10 years can claim both their benefit and a spousal benefit, which is 50 percent of their partner’s benefit. Most people strategize by figuring out which spouse has the potential for a higher benefit and then delay that payout until the person reaches age 70. If necessary, the couple can begin claiming the lower earner’s Social Security benefit early to ease finances and make it possible to delay. Once the higher earner reaches 70, the couple can then switch to that person’s benefit and have a greater overall payout. Maximizing Social Security income as a couple is important because of survivor’s payments. Taking this step ensures that the lower earner can still get enough of a benefit to live off of after a partner’s death.
5. Understand the ramifications of working.
You can continue to work while receiving a Social Security benefit, but this can have ramifications. If you are under full retirement age, you will get $1 deducted from benefit payments for every $2 earned over the annual limit, which is currently about $18,000. Once you reach full retirement age, the restrictions are more relaxed. After full retirement age, $1 gets deducted for every $3 earned over the maximum, which is now about $47,000.
Many people plan to continue working even after they retire, but earning too much money can reduce Social Security payments. Figuring out these potential reductions now is key to avoid being taken by surprise later.
6. Read statements about Social Security.
The Social Security Administration provides annual personalized statements to individuals as they get close to retirement age and then throughout retirement. The statements provide an estimate of monthly benefits, as well as potential payouts to children or spouses if the individual dies before retiring.
In addition, the statement includes a yearly earnings record and accounts for any potential spousal benefit. Reading the statement can help you understand exactly where you stand in terms of benefits and allows you to identify and correct any mistakes before they affect your payouts. Employers sometimes underreport income mistakenly.