Most people end up just “taking what they can get” when it comes to Social Security. If anything, they may vaguely know that delaying taking Social Security until age 70 will result in a greater monthly payout than taking benefits earlier than that. While it is true that delaying taking Social Security benefits until age 70 will result in a greater monthly payout, doing so may not, in fact, result in maximum total lifetime payouts for a given individual. There are other factors at play. That’s why it’s important to understand the specifics of how Social Security benefits are calculated and taxed, as well as how to use that understanding to get the maximum Social Security benefit for yourself.
Here are three strategies to get the maximum Social Security benefit.
1. Work at Least 35 Years—Or Make Sure Your Spouse Does
Your maximum Social Security benefit is based on when you start taking them and your 35 highest-earning years. Generally, the greater your average earnings (adjusted for inflation) over those 35 years, the greater your monthly Social Security benefit.
So if you’ve only, say, worked 30 years, those five years you didn’t work would count as zero-earning years and reduce your 35-year average. Working, even part-time, for an additional five years would ensure that you have at least some earnings for every year that the Social Security Administration will use to calculate your monthly benefits.
But what if you forewent a career to, say, raise children or pursue other endeavors? Don’t worry. You can receive your benefits based on your spouse’s earning history rather than your own. In this case, you can receive benefits of up to half of your spouse’s benefits. So if you’re in this situation, make sure that your spouse has worked at least 35 years to maximize both of your benefits.
Not sure how many years you or your spouse have worked? You can request your Social Security Statement online. On this statement, you’ll see your entire earnings history by year according to the Social Security database.
2. Consider Your Life Expectancy
Waiting until age 70 to start taking benefits will typically result in you getting a higher monthly Social Security benefit than if you started taking benefits earlier. But doing so may not necessarily result in you receiving more total Social Security benefits over your lifetime than if you started taking benefits earlier.
Since Social Security is a lifetime annuity, the number of months one receives benefits (how long they live) is obviously a significant factor when it comes to maximizing one’s benefits. Let’s say someone has a chronic health condition and passes away at the age of 71. If they started taking benefits at age 60, their monthly benefit would be significantly smaller than if they waited until age 70. However, starting to take benefits at age 60 would have resulted in 11 years of benefits for this hypothetical individual. In comparison, they’d only have one year of benefits if they’d waited until age 70.
Consider your life expectancy when mapping out your Social Security game plan. Does longevity run in your family? Did your parents or grandparents make it into their 80s or even 90s? If so, you may very well maximize your Social Security benefits by delaying taking Social Security until full retirement age or even age 70. This is because the higher monthly benefit you receive for, say, the twenty years between age 70 and age 90 may very well be greater than the lower monthly benefit you would have received over thirty years between age 60 and age 90.
In contrast, someone who does not anticipate living very long past age 70 may want to start taking benefits as early as possible—both for quality of life and because they will, in fact, maximize their lifetime Social Security benefits this way.
3. Plan Your Tax Situation
If you’re serious about maximizing your income, whether Social Security or otherwise, you have to take taxes into account.
The rules regarding the income taxation of Social Security benefits are a bit unusual. Some people’s Social Security benefits are not taxed at all, while up to 85% of others’ benefits are taxable. So make sure you understand them and plan accordingly.
In a nutshell, the greater your “combined income” during the year, the more of your Social Security benefits for that year are taxable at the federal level—up to 85%. Here’s the formula for combined income:
- Adjusted gross income, plus
- Tax-exempt interest income, plus
- 50% of your Social Security benefits
Consider making financial moves now to minimize your combined income once you start taking Social Security. For example, since distributions from a Roth IRA don’t count toward your combined income, but traditional IRA distributions do, consider gradually converting your traditional accounts to Roth accounts before taking Social Security. Of course, your tax rate on your future Social Security income is only one consideration to make when deciding whether and when to make traditional-to-Roth conversions!
Also, keep in mind that the IRS can automatically garnish up to 15% of your benefits and even more with a manual garnishment. So if you have any back tax debt, consider dealing with this issue before taking your benefits. Any semi-retired years during which you are winding down your career but aren’t yet taking Social Security benefits can be a prime time to reach a resolution with the IRS on your back taxes.
Finally, if you really want to escape the tax bite on your Social Security benefits, consider spending your golden years in a state that doesn’t impose a state income tax or at least doesn’t tax Social Security income (most don’t).
This article is intended for general informational and educational purposes only, and should not be construed as financial or tax advice. For more information about whether a reverse mortgage may be right for you, you should consult an independent financial advisor. For tax advice, please consult a tax professional.
