The Importance of Social Security Benefits

Social Security provides the foundation of retirement income for millions of Americans.  The fundamental definition is that a Social Security benefit is a monthly check you receive when you retire or if you become disabled.  It is financed through a payroll tax to which employers and employees contribute.

For many people, Social Security benefits make up a significant portion of their retirement income. Even for people who have other retirement income sources, Social Security benefits can help supplement them and provide a more comfortable retirement.  In this article, we will provide tips and strategies for maximizing your Social Security income.

Eligibility 

You must reach a certain age (currently 62) to be eligible for retirement benefits, and you must have earned a certain number of work credits throughout your working years.  If you wait until full retirement age, however (67), the benefit amount is more.

To be eligible for survivor benefits, spouses (including divorced spouses) and children of a deceased worker must meet certain requirements.  The benefits are based on the deceased worker’s earnings.

Disability benefits may be obtained if the applying individual has a medical condition/situation that meets Social Security’s definition of a disability – a medically determinable physical or mental impairment that has lasted or is expected to last for a continual period of at least one year or is expected to result in death.  It is based on the individual’s work history and if he or she has earned enough work credits to be eligible.

How Social Security Benefits Are Calculated

The primary Social Security benefit or the Primary Insurance Amount (PIA) is the basic benefit amount that an individual is entitled to at full retirement age.  The Average Indexed Monthly Earnings amount (AIME), which represents a person’s highest 35 years of earnings (adjusted for inflation – with Cost-of-Living adjustments), is used to calculate PIA.  Bend Points, portions of AIME in specific dollar amounts, are also used to calculate PIA.

Spousal benefits are based on the spouse’s earnings history, and surviving spouses and children may be eligible.

Those who claim Social Security benefits before their full retirement age will receive a reduced benefit amount and, conversely, those who delay claiming benefits past their full retirement age will receive an increased benefit amount.

Other adjustments, such as earnings limits and cost-of-living (COLA) adjustments, can impact the amount of Social Security benefits an individual receives.

Strategies for Maximizing Social Security Benefits

Delaying Social Security benefits can result in a higher monthly benefit amount.  An individual can delay benefits by continuing to work, using other retirement income sources, or tapping into savings.

Claiming spousal benefits can result in a higher monthly benefit amount, as well.  A spouse may be eligible for spousal benefits based on their spouse’s earnings history.  Coordinate with your spouse to determine the best strategy for claiming spousal benefits.  Figure out who was the higher earner or the spouse with the higher PIA.  Decide who will collect benefits first, and who should wait.  The longer the spouse with the higher benefit waits, the better the benefit for both spouses.

Surviving spouses and children may be eligible for survivor benefits based on the deceased worker’s earnings history.  Claiming survivor benefits can result in a higher monthly benefit amount.  Individuals can coordinate with their family members to determine the best strategy for claiming survivor benefits.

If you were born before January 2, 1954 you may be eligible to use a Restricted Application Strategy, which can result in a higher monthly benefit amount.  A restricted application means you’re not applying for all benefits for which you are eligible at the same time.

To get the most out of your Social Services benefits, you can continue working, start a side hustle (part-time job), or go back to school to learn a new skill to increase your earnings, be aware, though, that earnings can impact Social Security benefits.  If you claim your benefits before full retirement age, they may be decreased if you earn too much.  Currently the cap stands at just over $21,000. Talk with your employer to determine a plan for a possible reduction in hours worked/earnings or delay claiming benefits until your full retirement age.

Avoiding Social Services Earnings Reductions – Managing Taxable Income

Social Security benefits may be taxable, depending on your individual income.  You can use tax planning strategies to minimize your taxable income and reduce the impact on your Social Security benefits.  Withdrawals from traditional retirement accounts can adversely affect Social Security benefits, but withdrawals from Roth retirement accounts do not impact them, so you may want to consider using Roth accounts to supplement your income in retirement.

Other Considerations

You become eligible for Medicare at age 65.  If you’re receiving Social Security benefits at that time, the Social Security Administration will send enrollment information at the start of your initial enrollment period.

The Windfall Elimination Provision (WEP) is a provision in U.S. law that can impact how Social Security benefits are calculated.  It can reduce retirement or disability benefits if you receive a pension from a job not covered by Social Security.

The Government Pension Offset (GPO) can impact those who receive a government pension and are also eligible for Social Security benefits.  If you receive a government pension but did not pay Social Security taxes while you had that job, Social Security Administration will reduce benefits to a spouse, widow or widower by two-thirds of the amount of the government pension.

Don’t Wait

Don’t wait until the last minute to secure your financial future.  As author Charles Baxter said, “Gainfully unemployed. Very proud of it, too.”  Ensure your gainful unemployment and take the steps necessary to do so by visiting the Social Security Administration’s website, www.ssa.gov.  The site provides information on Social Security benefits and the tools to help you make informed decisions.