You’ve earned your Social Security benefits, here’s how to get the most out of it.
When it comes to planning your retirement and taking Social Security benefits, Americans should be focused on an important number—35. That’s the number of years the Social Security Administration bases monthly benefits on once the person takes it at age 62 or once they earn full retirement benefits starting at 66.
Jim Blankenship, a certified financial planner and author of A Social Security Owner’s Manual, says if you’ve worked for only the years in which Social Security taxes were withheld, that means those five years would have zeros averaged into the calculation. For those with at least 35 years of employment, they may not have zeros but their incomes were so low when they were younger that it will bring down their monthly benefits once they take Social Security, he says.
“If you have zeros in your past or low earning years, you want to replace them to boost your benefits,” Blankenship says. “It depends on the earnings, but it could be substantial. When you’re talking about monthly benefits of $1,200, it could bring it down $100 or $200 a month.”
Blankenship says that’s one reason why people should delay filing for benefits at 62 when they can’t receive full benefits anyway. That starts at 66 and people can benefit by delaying taking benefits until age 70, essentially earning an eight percent increase each year by waiting.
“If people are self employed, it makes good sense to claim income against Social Security and pay the tax and eliminate those zero years in their record,” Blankenship says. “Most people have much higher earnings at 64 than they did when they were 22.”
Blankenship says he wrote the owner’s manual to help people plan their future for taking Social Security benefits and make the best decisions to earn the maximum benefits they can. There are many strategies people can take and how it impacts benefits as individuals and couples, and it helps to understand it, he says.
“I have found there are a lot of misunderstandings out there,” Blankenship says. “A lot of folks don’t realize that it could be in their favor to delay taking benefits for one. They think they paid into the system their entire lives and say, ‘I’m going to start taking benefits right away because ‘my golly, it’s mine.’ That’s not necessarily the best way to look at it.”
The one strategy is for one spouse who has earned the most during their lifetime and has the highest benefit to continue working later to ensure the surviving spouse has the highest possible monthly payment.
Blankenship encourages people to seek out advice and information before they make decisions on taking their Social Security benefits. One problem is that the frontline staff of the Social Security Administration doesn’t provide the guidance you need to get the maximum benefits you can receive at that time.
People should ask for a supervisor or caseworker to get the information that will help map out a strategy, he says.
Since it’s tax season, it’s important that recipients of Social Security benefits understand the tax laws, Blankenship says. The Social Security Administration estimates about one-third of those beneficiaries pay taxes on their monthly benefits.
The most that people can be taxed on their benefits is 85 percent. For that to occur, an individual needs a combined income greater than $34,000. Combined income is the figure calculated by adjusted gross income, nontaxable interest and half of your Social Security benefits. That number is more than $44,000 combined income for couples filing a joint return. An individual pays an income tax of up to 50 percent of your benefits on combined income of $25,000 to $34,000. For couples, that’s between $32,000 and $44,000.
Besides dealing with taxation, many people who take their Social Security benefits prior to age 66 need be careful of the earnings limit or they will be penalized, Blankenship says.
Those who earn $15,480 in 2014 will have $1 withheld from their monthly benefit for every $2 they earn above the limit. That limit increases to $41,400 the year you turn 66 and then $1 is withheld for every $3 in pay above the limit, Blankenship says.
There’s no penalty for working and receiving benefits at the same time once you turn 66, he says.