By Chaz Fahrner, CFP®, EA, MSBA
As you near retirement, there are many questions that arise. The biggest question, for most people, is what age to start receiving your Social Security benefit. I often get questions about this because it can be very complex. There are few financial assurances in retirement, but your Social Security benefit is as close as it may get. Choosing when to begin your Social Security benefit is very important because your age at retirement determines the amount of money you will receive for the rest of your life. Assuming social security benefits are available and that you qualify, you need to consider the following tips to boost your benefit.
Delay
You can start Social Security as early as age 62 or as late as 70 years of age. You are probably thinking that you would most certainly start your benefit at age 62, right? Not so fast! The result for delaying your benefit until your full retirement age, which is 66 or 67 years of age, adds a 6% annual-compounding increase to your benefit. It’s even more compelling to delay past your full retirement age until age 70 because you will receive an 8% annual-compounding increase beyond your full retirement age amount. Waiting 8 years to start your benefit increases the amount you’ll receive by up to 75% for the rest of your life. This basically means that if your benefit is $1,000 per month, when you are age 62, your benefit at age 70 will be $1,750 per month, not including the automatic inflation adjustments that your benefit will earn. This decision is obviously very personal, but if you are healthy and have longevity in your family, it often makes sense to wait until 70 years of age.
Resurrect
Many people are struggling financially right now because of the global pandemic. For individuals that have been forced to start Social Security sooner than planned, and now regret their decision, may have an opportunity to resurrect their benefit. You can pay back the benefit amount you received and earn the advantage of the compounding growth as if you never started your benefit. To qualify, you must pay back the benefit amount within the first 12 months from when you started. Use Form SSA-521 to accomplish this.
Work Longer
Working longer can increase your benefit because of the way your Social Security benefit is calculated. Your benefit is based on your highest 35 years of earnings, adjusted for inflation. Typically, you make more money in your later years than your early years when you were a lifeguard or flipping burgers in high school. Once you accomplish paying into the system for 35 years, your lowest income earning years will be replaced by the higher income earning years. Working those last few years can really help boost your Social Security benefit.
Reduce Taxes
A great way to increase your Social Security benefit is to reduce the taxation of your benefit. The good news is that the federal government will only tax a maximum of 85% of your Social Security benefit. Even better news, the state of California, and many other states, do not tax any of your Social Security benefit. Finally, the best news is if you strategize and transfer your tax deferred accounts into tax-free Roth accounts, you may eliminate all of your Social Security taxes in retirement. The objective, for 2021, is to keep your income below $32,000 for joint filers and $25,000 for individual filers. If you can accomplish this, then you will not pay taxes on your Social Security benefits at all. The best way to reduce your taxable income in retirement is to create and implement a Roth conversion strategy well before you start social security. It is basically taking money out of your accounts that will be 100% taxable and moving them to a tax-free Roth account. If done correctly, your accounts will grow tax-free and be accessible tax-free, along with all of your Social Security being tax-free. This is a very simplistic description of how this strategy can work and it may not make sense for everyone, so please reach out to a financial professional to see if this option may be right for you.
Folks are living longer in the United States, because we are living healthier lifestyles. Although the increase in life expectancy is a positive change for many of us, there may be some financial risks that should be considered. Maximizing your Social Security benefit is a great way to alleviate those risks and allow you to enjoy your retirement.