How to Make Social Security Work for You
Published: December 14, 2020
While Social Security alone may not provide enough for a comfortable retirement, it can go a longer way when you maximize your benefits.
Do not underestimate the complexity of Social Security benefits. There are all sorts of interesting factors that impact how much you’ll get. These include your work history, your age, your income, and perhaps your spouse’s benefits if you survive him or her.
Postpone retirement until you’ve worked 35 years. You’ll get the most out of Social Security by working for at least 35 years at jobs that deduct payroll taxes. That’s because your benefits are calculated on the 35 years with the highest incomes. Social Security will factor in zeros when you work fewer years, and that will reduce your payout. By the way, increasing your income will increase your benefits. For 2020, earnings up to $137,700 count toward your benefits1.
Work until you reach full retirement age. You get full benefits when you don’t claim them until you reach full retirement age. The full retirement age is 66 if you were born from 1943 to 1954. If you were born later, that age is 672. By working until you retire, you have a better chance of reaching the 35-year threshold, and you may displace lower-income years. You can earn benefits exceeding the full amount by postponing your claim after reaching full retirement age. You’ll earn your maximum benefit by waiting until age 70.
Understand reductions and taxation. If you claim benefits before full retirement age, Social Security will reduce your payments by $1 for each $2 you earned above the annual limit ($18,240 in 2020). Reductions cease once you reach full retirement age. In the year you reach retirement age, your benefit is reduced by $1 for every $3 above the annual limit ($48,600 in 2020) until you reach your birth month, then all reductions cease3. Your benefits may be taxable if your combined income (i.e., adjusted gross income plus nontaxable interest plus ½ of your Social Security benefits) exceeds certain limits. In 2020, the tax rate on your benefits is 50% when your combined income is between $25,000 and $34,000 for single filers and between $32,000 and $44,000 for those filing jointly. A higher combined income causes 85% of your benefits to be taxed4.
Benefits information at your fingertips. All you have to do is sign up at my Social Security at www.ssa.gov/myaccount. The website can tell you your currently available monthly benefit amount as well as estimate your monthly benefit if you postpone your claim. It also gives you information about your earnings counting towards your Social Security benefits, as well as your spouse’s benefits if you die first. You can check to make sure all your qualifying earnings have been counted. In addition, every December you’ll receive mail from the Social Security Administration describing your benefits for the upcoming year.
Claiming Social Security benefits is a big step. It’s important to understand your options before taking withdrawals. Otherwise, you may shortchange your benefits and complicate your retirement. Contact our partners at Fellows Financial Group if you are thinking about claiming your benefits. They'll help you understand all of your options and how they fit into your overall retirement plan.
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Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Wealthcare Advisory Partners, a registered investment advisor. Wealthcare Advisory Partners and Fellows Financial Group, LLC are separate entities from LPL Financial.
This material was prepared for Fellows Financial Group advisor Michael Schimmel and does not necessarily represent the views of the presenting party or their affiliates. This information has been derived from sources believed to be accurate. Please note—investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting, or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax, or legal advice and may not be relied on for the purpose of avoiding any federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
1ssa.gov/benefits/retirement/planner/maxtax.html
2ssa.gov/benefits/retirement/planner/agereduction.html