Ready For Retirement
Ready For Retirement
The Complete Guide to Maximizing Your Social Security Benefit
For many, Social Security makes up a large portion of their retirement income, so it’s important to know how to maximize your Social Security benefit. James explains how Social Security works, diving into some important foundational aspects. He then explains four key strategies for maximizing benefits:
1. Work for 35 years to avoid zero-income years in the calculation.
2. Delay benefits, if possible, until age 70, increasing payments by 8% annually after full retirement age.
3. Leverage spousal benefits, allowing a lower-earning spouse to claim up to 50% of the higher-earning spouse's benefit.
4. Plan for survivor benefits, where a surviving spouse can receive 100% of the deceased spouse’s benefits.
By understanding how these factors work, retirees can make informed decisions to maximize their Social Security income, reducing pressure on their savings and ensuring a more stable retirement.
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Questions answered:
How is Social Security funded, and how does it affect my retirement income?
How are Social Security benefits calculated based on my earnings?
Timestamps:
0:00 - How SS works
4:16 - Drilling deeper
6:27 - Full retirement age
8:08 - Work 35 years
10:08 - If possible, wait
12:17 - Spousal benefits
14:03 - Survivor benefits
17:39 - Summary
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It's not uncommon for Social Security to make up more than half of someone's income in their retirement years, and because of this because Social Security is such a substantial amount of the income you might be receiving it's crucial that you maximize that income.
Speaker 1:On today's episode of Ready for Retirement, we're going to walk through what you can do to maximize your Social Security benefit, so you can maximize your overall income in retirement. This is another episode of Ready for Retirement. I'm your host, james Canole, and I'm here to teach you how to get the most out of life with your money. And now on to the episode. Now, as we jump in, as we start to talk about how do you maximize your social security income, it starts with understanding fully how social security works. So what I'm going to do is I'm going to explain how social security works, how it's calculated, and then walk through four simple things you can do to maximize your social security benefit. So let's start with understanding how social security is funded. When you earn a paycheck, you pay federal taxes and, depending on what state you live in, you may also pay state taxes. Neither of those go to fund social security. Social security is funded through another tax called FICA taxes or payroll taxes. The way FICA taxes work is 7.65% of every dollar that you earn up to a cap is also withheld from your paycheck. Those dollars that are withheld then go to fund Social Security and go to fund Medicare. The way that works is 7.65% of your paycheck as the employee is withheld in addition to federal and even potentially state income taxes, and your employer is matching another 7.65% on their end. So, when you look at it, 15.3% of additional taxes are assessed on your income up toa certain base, and that's what's going to fund social security and Medicare. Now, of this 7.65%, 6.2% is social security funding and the remaining 1.45% goes to fund Social Security and Medicare. Now, of this 7.65%, 6.2% is Social Security funding and the remaining 1.45% goes to fund Medicare. Now, with Social Security, you don't pay that income tax on everything, and the same way that your Social Security benefit is capped, so too is the wage base that you pay Social Security taxes on. For 2024, that wage base is $168,600. So the first $168,600 that you earn 7.65% is going to be withheld in payroll taxes to fund social security and Medicare. Any dollars beyond $168,600, you still pay Medicare taxes, which is 1.45%, but you're no longer paying any social security tax. Once again, that is matched by the employer. So in the first 168,600, a combined 12.4% is withheld to pay social security, to fund social security.
Speaker 1:Now how does that get calculated? Does that mean that if you pay into social security you're magically going to have the same benefit of anyone else that paid into social security? Not necessarily, in fact almost never. Social Security is based upon your 35 highest years of earnings. They're looking at your average index monthly earnings and what they're going to do is they're going to wait that, of course, for inflation. So if you make $100,000 today, that's not going to be calculated the same exact way as if you earned $100,000 back in 1990. There's an inflation adjustment. So every single year social security is going to weight your earnings for inflation to see how much should they play in to your overall social security benefit to fund what's called your primary insurance amount when you reach your full retirement age.
Speaker 1:Just to provide some simple context in 2024, that wage base for social security, like we discussed, is $168,600. In 1994, so 30 years ago, $60,600 was the wage base for social security. So what you can see is if you earned $60,600 in 1994, that fully maxed out your average index monthly earnings for social security or the weighting of how much that went into your overall benefit, the same way that it would have if you earned $168,600 in 2024. Now, another thing to note is these earnings don't all contribute proportionately to your social security benefit. So, as I just mentioned, the top 35 years of earnings are what social security uses to determine your benefit. So if you only have, let's say, 25 years of earnings because you made tons of money for the first 25 years of your career, you saved diligently and then you retired, it doesn't matter if every single year you maxed out your social security benefit. You only had 25 years. So the remaining 10 years are going to be included as zeros of social security, saying you have 25 years of maxed out earnings and 10 years of $0 in earnings, and your social security benefit is going to be weighted accordingly. Now let's drill deeper down into how this actually works. Let's assume you have one individual who makes exactly $168,600, so they max out their social security earnings for the year and you have another individual that makes exactly half of that $84,300. If they made those same exact amounts adjusted for inflation for the next 35 years, does that mean the individual one will have exactly double the benefit of individual two because they paid an exactly double into social security. It doesn't.
Speaker 1:Social security is means tested and it's means tested by something called bend points. Here's how bend points work the first $1,174 of monthly earnings that you earn in 2024, 90% of those earnings are weighted into how social security is calculated. So the first relatively small amount that you make $1,174 per month that's weighted pretty heavily in your social security calculation. Month, that's weighted pretty heavily in your social security calculation. The next amounts between $1,174 and $7,078,. 32% of that is weighted in your calculation of your primary insurance amount. So the benefit you'd receive at your full retirement age and anything you earn over $7,078 per month, 15% of that is weighted into your benefit for social security.
Speaker 1:So what you can see here is the first dollars that you're earning Someone that's earning a relatively low income, that income is really heavily weighted into their social security calculation, versus someone who's earning a very high income. Well, some of their dollars that they earn the first 1174 are weighted at 90%, but then each successive dollar above that is weighted somewhere between 32% and 15% into their final benefit. So what this means is someone earning a relatively low income is going to have a proportionately higher social security benefit relative to their income than as someone who earned a very high income over the course of their career. So I'm gonna come back to that because that's actually really important to know as we start to turn our attention to how do we maximize our benefits in just a little bit here. But understand that the first dollars that you make each month, your average indexed monthly earnings those are more heavily weighted into what your ultimate benefit is going to be at your full retirement age. That brings us to our next point.
Speaker 1:Social security has what's called a full retirement age. Depending on the year in which you were born, your full retirement age is somewhere between age 66 and 67. That is when you receive your primary insurance amount. So if you take those 35 years of averaged indexed monthly earnings, social security runs the calculation based on what your monthly earnings were over those 35 years and says at this year your full retirement age let's assume age 67, here's your primary insurance amount. That's your full benefit, your full retirement age benefit. That being said, you can collect early, in which case you would take a reduction in benefits. You can collect as early as age 62 for your own benefit or if you're collecting survivor benefits, you can actually collect as soon as age 60, or you can wait all the way until age 70 and collect an even higher benefit at that time. So that's a basic overview, to start, of how is social security determined. One we've looked at how is it funded via different payroll taxes. Two, we looked at how the fact that different monthly earnings amounts are calculated differently or assessed differently in terms of how much they're going to proportionally impact your primary insurance amount for social security. Three, we talked about your primary insurance amount being the amount that you receive at full retirement age, so somewhere between 66 and 67. And then, finally, we established that you can collect benefits as soon as age 62 and as late as age 70. So keep that in mind.
Speaker 1:That might be a refresher for a lot of you. Some of you that might be new information, but with that information we can now look at what are four simple things that you can do to maximize your Social Security benefit. We don't just want information on how Social Security is determined. We want to know how can we apply that information to our situation to maximize what our benefit is going to be. So let's jump into that.
Speaker 1:Number one. The first thing that you can do to maximize your Social Security benefit is, quite simply, is work 35 years. Now some of you might be saying I don't want to work 35 years. I've worked 30 years, I'm in a good spot to retire. Why would I keep going? Well, you don't necessarily have to work 35 more years of full work, of your full employment, of your full wage base.
Speaker 1:Remember what I said about monthly earnings and how the initial amounts are weighted more heavily in the overall calculation than are the higher amounts. So remember the first $1,174,. These are 2024 numbers. Every year these are going to go up a little bit. The first $1,174, a full 90% of that amount is weighted in your social security benefit amount. Any amounts above $7,078 per month only 15% of every dollar earned past that is weighted into your social security amount.
Speaker 1:So what does that mean? It means well, if you have 30 years of work and you're ready to retire, does it make sense to work five more years, not at the full wage base, not a full-time employment? Like you, maybe you were previously working, but can you earn just a little bit? Because that little bit is going to be weighted more heavily in your overall social security calculation than having to work and earn a full wage base, earn a full salary for five more years. So this is something that you can consider, because if you don't do that, it doesn't matter if you've earned a million dollars a year for 30 years. If you stop there, social security is going to see you have 30 years of really strong earnings and five years of zero earnings, and it's going to see you have 30 years of really strong earnings and five years of zero earnings and it's going to hurt your overall benefit because of those zeros. So are there things you can do to earn a little bit of income to get the full 35 years, because that's going to allow you to maximize your benefit. And, like we talked about the beginning, it doesn't matter if you're going into retirement just social security, or social security and millions of dollars. Your social security benefit can be a real substantial income base for all of you, regardless of what your portfolio assets are. So what can we do to maximize that? Sometimes working a couple few more years, even at lower income rates, can go a long way in helping us to do so.
Speaker 1:The second thing that you can do to maximize your Social Security benefit is to wait, if possible. Every year before your full retirement age that you begin collecting social security early, you are reducing your annual benefit by anywhere between 5% and 6.67% per year. Now the way that it actually works is every month early that you collect, one twelfth of that amount is actually deducted from your overall benefit. So you don't have to actually wait until the year mark to collect. Every single month that you delay or every single month that you collect early, you're getting a proportionate change to your social security amount. But every year that you collect early, every month that you collect early, that's decreasing your benefit. And on the flip side, every year after your full retirement age that you wait, you get what are called delayed retirement credits. A delayed retirement credit is an extra 8% per year on your social security benefit. So if your full retirement age is age 67 and you wait until age 70 to collect, that's 24% increase that you're going to receive on whatever your full retirement age benefit was. If your full retirement age benefit was a thousand dollars, for most of you it's going to be a lot more. But I'm just going to use a nice simple number for simple math. If you were to collect $1,000 at age 67, but instead you waited until age 70, you would now get $1,240. So a 24% increase by waiting those three additional years.
Speaker 1:Now one caveat that I want to add to this. So many people, when they're looking at social security and how do I maximize my benefit, they're just looking at social security in a vacuum and what they'll tell you is, generally speaking, if you're going to live past your early eighties, it makes sense to delay your social security benefit to age 70 because you're getting a larger benefit and you're now collecting for enough years to make it worthwhile. The reality is, you need to look at your overall financial situation. You need to look at the impact that delaying your benefit might have on the rest of your portfolio. You need to look at tax implications. You need to look at so many different things. I don't want to make this as simple as just saying wait to delay your benefit always, because it doesn't always make sense. But if you're just looking to see how can I maximize my social security benefit and do so in a vacuum, then waiting to collect your benefit until age 70 is the best thing that you can do for that.
Speaker 1:The third thing that you can do to maximize your social security benefit is to look at spousal benefits. So when you go to collect social security, you're eligible for the greater of 100% of your benefit or 50% of your spouse's benefit, and there's some rules around this. I've done other podcasts to outline this. But with spousal benefits, you're eligible for, like I said, up to 50% of your spouse's earnings record. So let's take a look at an example. Maybe your spouse has a benefit of $3,000 per month at their full retirement age and you stayed at home to raise the children, or you just did not work and earn very much over the course of your career, and your own benefit would only be $1,000 a month. Well, if you look at that, you could collect $1,000 a month. That's for you, but that's less than your spousal benefit. Your spousal benefit would be half of your spouse, so half of their $3,000, which is $1,500 per month. So simply by looking at the both of your benefits and understanding that you're eligible for either 100% of yours or 50% of your spouse's allows you to maximize your benefit, because you're now taking a benefit based on their earnings record and that's allowing you to increase your benefit by, in this example, at least 50%. Obviously, this is going to depend upon your specific situation and a number of other factors, but this can be a great thing to take advantage of.
Speaker 1:Another thing to note is if you were divorced but you were previously married for at least 10 years, you can still get a spousal benefit based upon your ex-spouse's earnings record. So if you're married for 10 years and you're no longer married and your ex-spouse earned significantly more than you over the course of your career, you're not stuck with only your benefit. You still have the option of collecting that spousal benefit. And this ties into point number four, how you can maximize social security benefits. You're also eligible for a survivor benefit in the event that your ex-spouse passes away. So this is point number four on how you can maximize your social security benefits is take into account survivor benefits. So the way spousal benefits work is you're eligible for up to 50% of whatever your spouse's primary insurance amount was.
Speaker 1:Assuming you wait until your full retirement age or beyond to collect With a survivor benefit, you get a full 100 percent of your spouse's benefit, should they pre-decease you. So some people get this mixed up. They say I thought I was only eligible for 50 percent. That's true when your spouse, or even your ex-spouse, is still living. As soon as your spouse passes, though, you are eligible for 100% of whatever their benefit would be, and here's a key distinction with the spousal benefits. So what we just talked about, the 50% that you are eligible for, is based upon a maximum of their primary insurance amount, so it's based upon a 50% amount of what they could have received at age 67, even if they wait until age 70, for example. So by waiting until age 70, they're increasing their benefit, but your spousal benefit is still based upon 50% of what they would have earned at full retirement age, so 67,.
Speaker 1:For many of you listening to this, with survivor benefits, that's not the case. If your spouse waits until age 70 to maximize their benefit and then they pass away, you get 100% of their benefit at their age 70. So you just simply get a continuation of that. So this is a really important planning point for many people, because if you're married, social security is very much a dual spouse decision. It's not just based on your life expectancy and what you need to do to maximize benefits over your lifetime. You have to also take into account your spouse. If one of you has a short life expectancy but one has a long life expectancy.
Speaker 1:Well, that individual who has a short life expectancy, if they were the higher earner and if they have the higher benefit, if it was just them that we're making the decision on, let's assume they're going to pass away at age 75. And we knew that for certain. Well, if it was just them we're making the decision on, we probably wouldn't advise them to wait until age 70 to collect benefits. Sure, you maxed out your benefit, but only for five years, so you still came out behind. Versus how do you started collecting earlier?
Speaker 1:But and this is again assuming we could predict the future if we knew that individual was going to pass away at age 75, but that individual is married and their spouse, we knew for certain, was going to live until age 95, even though it might not make sense for that individual to delay their own benefit until age 70, it does in this case because their spouse would get a survivor benefit. Now, I shouldn't automatically say that, because it depends upon a few factors, including their spouse's benefit. But this is something that's really important to take into account is that by maximizing one benefit, it's not just maximizing that benefit for that individual's lifetime, it's also doing it for their spouse's lifetime. Now this is actually one of those areas where there's a lot of planning to be done, because when you look at survivor benefits, if you have a spouse that passed away, the surviving spouse has an option, assuming they haven't both collected social security yet. The surviving spouse can say I'm going to collect a survivor benefit, effective immediately, while I allow my own benefit to continue growing until age 70. And then, at my age 70, I'm going to switch over to my own benefit. Or vice versa, they might say I'm going to take my own benefit today, I'm going to allow the survivor benefit to continue growing up to a certain point and then switch over to that. So if you have a spouse that does pass away before the both of you are collecting social security, there's actually a ton of planning that you can do that can add a lot more to your overall lifetime benefit, with the goal again going back to the very beginning of how can you maximize that social security base, because that's going to be a really strong income base for the entirety of your retirement. So, as we start to wrap that up, if you can understand how social security works, how it's taxed, how monthly earnings are indexed for inflation and included in your social security calculation, how different ages impact this, how being married impacts this. If you can understand how Social Security works, then you can take these simple steps to maximize your Social Security benefit. When you maximize your Social Security benefit, it puts way less pressure on the rest of your portfolio. It puts way less pressure on the other things that you need to do to create a secure retirement. So I hope this was helpful to explore as we start to look at what you can do to maximize your Social Security benefit.
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Speaker 1:Nothing in this podcast should be construed as investment, tax, legal or other financial advice. It is for informational purposes only. How Root Financial can help you implement the techniques I discussed in this podcast. Then go to rootfinancialpartnerscom and click start here, where you can schedule a call with one of our advisors. We work with clients all over the country and we love the opportunity to speak with you about your goals and how we might be able to help. And please remember, nothing we discuss in this podcast is intended to serve as advice. You should always consult a financial, legal or tax professional who's familiar with your unique circumstances before making any financial decisions.
