How Can You Increase Your Social Security Benefit? In today's video, I will share a few simple strategies to boost your Social Security benefits during your retirement.
Hello, everyone, Tim Doehrmann here, founder of Eagle Ridge Wealth Advisors, and I'm here to guide you on how to optimize your financial well-being in retirement, and today we’re focusing on Social Security.
Let’s start by discussing how Social Security operates, including its calculation methods, underlying factors, and the key elements involved. We'll also go over how this can empower you to make the most of this system, especially when it comes to increasing or maximizing your retirement income.
But before diving into a few simple tips for enhancing your Social Security benefits, let's take a moment to understand how Social Security functions.
How Social Security is Funded
It's crucial to begin with how Social Security is funded. If you look at your paycheck, you'll notice federal taxes, and depending on your location, state taxes may also apply. But the funding source for Social Security is a unique one. It derives from FICA taxes, also known as payroll taxes, which are distinct from your conventional federal and state income taxes.
The Social Security payroll tax, for 2023, is set at 6.2% of your income, up to the first $168,600 you earn. This is an annual cap, and it may increase slightly in subsequent years. In addition to your 6.2%, your employer matches this tax, contributing another 6.2% on your behalf.
An additional 1.45% goes towards Medicare, and this is also part of FICA taxes, and your employer will match this as well, with an additional 1.45% to fund Medicare. So, that’s 7.65% that is paid by you, and 7.65% paid by your employer for a total of 15.3% of your paycheck that goes to fund Social Security and Medicare.
How Social Security Benefits are Calculated
Moving on to the calculation of your Social Security benefits. Your benefit is based on your 35 highest-earning years. These earnings are adjusted for inflation.
To illustrate this point, let's consider that the Social Security tax for 2024 is levied on the first $168,600 of your income. Now, if we go back 20 years ago, to 2004, the cap was $87,900. This means that 20 years ago, you had to earn $87,900 to maximize your Social Security benefit for that year.
Now, fast forward to 2024, and as I mentioned, you need to earn $168,600 to reach the same cap. So, Social Security accounts for inflation by indexing your historical earnings.
Also, if you have years with no earnings or if you've worked for fewer than 35 years, zero income is factored in for the remaining years to reach that total of 35.
It's worth noting that earnings are means-tested. What the heck does that mean? Well, it means that the initial dollars you earn have a more significant impact on your Social Security benefit calculation.
For 2024, the first $1,174 of your earnings make up 90% of the calculation. From $1,174 to $7,078, 32% of those earnings count, and beyond $7,078, 15% is included in the benefit calculation.
In essence, this means that Social Security is progressive, but since it will pay out a higher amount relative to a lower amount put into it, it's the opposite of our progressive tax system, where the higher amount we earn the higher our marginal tax rates will be.
So basically, Social Security benefits lower earners more than higher earners, on a dollar-for-dollar basis.
Full Retirement Age
Now, Social Security also has a “Full Retirement Age”, typically between 66 and 67 nowadays. If you were born in 1960 or later, your Full Retirement Age is 67. This is not the age at which you're obligated to claim Social Security, but it's the age at which you receive your Primary Insurance Amount (or full retirement age amount) without any reductions.
You can claim benefits as early as 62, but this will of course be a reduction from what you could receive later. You can also wait until as late as 70, and accrue delayed retirement credits, that will increase your benefit by 8% annually.
How to Maximize Your Social Security Benefit
Now, let's explore how you can boost or maximize your Social Security benefit:
1. Work for a full 35 years: It's essential to fill all 35 years of your earnings history. This doesn't necessarily mean working in a high-income, stressful job for 35 years. You can contribute something, even part-time or lower-paying work, to avoid having zero-income years that would otherwise lower your benefit. And remember, the first dollars you earn, count the most towards your benefit, so, having income, even at relatively lower levels, can be very beneficial.
2. Delay claiming: Waiting until your Full Retirement Age or even later can significantly increase your benefit. While claiming benefits before Full Retirement Age will result in a reduction, delaying until after FRA will provide delayed retirement credits, boosting your benefit 8% per year, as I mentioned earlier.
People are always interested in their “breakeven age,” if they start taking their benefit early as opposed to later, as they should be, but I like to frame Social Security as insurance against longevity risk, essentially the risk of living longer than you think you might. Potentially a good problem to have if you have quality of life as well. Delaying your benefit as long as you are able to, will give you the higher benefit, helping mitigate longevity risk.
3. Understand spousal benefits: If you're married, you're eligible for spousal benefits, which are typically 50% of your spouse's benefit at their (and your) Full Retirement Age. This also applies to ex-spouses. If your own benefit is less than 50% of your spouse's, you can opt for the spousal benefit.
4. Survivor benefits: In the unfortunate event that your spouse passes away, you can receive 100% of their benefit. Understanding how survivor benefits work, will allow you to make strategic decisions to maximize your benefits and/or protect a surviving spouse.
First, the benefit a surviving spouse receives depends on two factors: 1) the age of the deceased and 2) the age of the survivor.
When a spouse passes, the SSA pays an eligible surviving spouse a percentage of the deceased's retirement benefits, depending on the deceased's age: If the deceased did not reach full retirement age, the surviving spouse can receive 100% of the retirement benefit.
If the deceased reached retirement age, the surviving spouse can receive whatever the deceased spouse was entitled to in the month of their death.
Similarly, if the deceased already received monthly payments, the surviving spouse is entitled to what they received in the month of their death.
Now, as a surviving spouse, you're entitled to 100% of the deceased spouse’s benefit, once you reach your full retirement age.
And, if you're younger than full retirement age but at least age 60 (or age 50 with a disability), you are entitled to a reduced benefit.
Unfortunately, you cannot claim your deceased spouse's benefits in addition to your own retirement benefits. Social Security will only pay one— the survivor or the retirement benefit, not both.
But if you qualify for both survivor and retirement benefits, you will receive whichever amount is higher.
This means that if you already receive retirement benefits, you can't apply for survivor benefits, if they are less than your retirement benefits.
However, you can file for one, whichever is lower, and let the other grow and file for it later.
I hope you found this useful, because knowing how Social Security works can greatly influence the financial quality of your retirement. You’re going to want to coordinate your Social Security benefit with the rest of your financial situation and investments, in order to maximize income streams, reduce risks, and limit your lifetime tax liabilities.
Remember, in retirement, your tax rate is going to be determined more by where your income comes from, rather than your income itself.
A CERTIFIED financial planner™ professional can help you plan for your retirement. Schedule a call today so we can talk about your situation.