Ready For Retirement
Ready For Retirement
5 Advanced Social Security Strategies to Maximize Your Retirement Income
To maximize your Social Security benefits in retirement, it’s essential to understand five key limits and thresholds:
✅ Earnings Limit: If you start Social Security before full retirement age, benefits may be reduced if your wages exceed the annual or monthly earnings limit. Only income earned after starting benefits counts.
✅ Social Security Wage Base: This is the maximum amount of earnings subject to Social Security taxes each year. It impacts both how much you pay into the system and the benefits you may receive.
✅ Maximum Benefit: Your benefit amount is based on factors like your lifetime earnings and the age at which you begin collecting benefits. Delaying benefits increases your monthly payments, while starting early reduces them.
✅ Provisional Income: This determines how much of your Social Security benefit is taxable. Higher income levels can result in up to 85% of your benefit being taxed at the federal level.
✅ Bend Points: These thresholds influence how your lifetime earnings are converted into benefits. Lower earnings are replaced at a higher percentage, meaning early contributions can have a significant impact.
Understanding these limits helps you make strategic decisions and optimize your retirement income.
Questions answered:
1. How can I maximize my Social Security benefits and avoid unnecessary reductions?
2. What factors determine how much Social Security I will receive in retirement?
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Timestamps:
0:00 - David's question
1:47 - SS earnings limit
4:51 - Monthly numbers matter
6:04 - SS wage base
9:11 - Max SS earning amount
11:26 - Provisional income
13:32 - SS bend points
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Today, we're going to talk about five different social security limits that you need to know if you want to maximize your social security income in retirement. This episode is based upon a listener question, and what I'm going to do is answer the question directly, but then tie this into a bigger conversation about all the different things you need to know to make the most of your social security benefit. 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.
Speaker 1:This question comes from David, and David says the following. He says I've watched many of your videos, and others as well, concerning earnings tests, and I have a simple question I've never had a direct answer to. I will be 63 in December and if I apply for my social security to start in January of 2025, can I work full time until I reach the earnings test limit for 2025 and take off the rest of the year? It would be May of 2025. So would I be on the yearly earnings test since I'm starting at the beginning of the year? Thank you so much for your time and your wisdom on this issue from David. Well, david, I'm going to answer your question directly, like I said, and then I'm going to tie this into a few other things that are probably relevant as well. But to answer your question directly, any earnings that you receive before turning on your Social Security benefit are not included in the earnings limit test. The earnings limit test only has to do with earnings that you receive once you have begun your Social Security. So, in this example, up until April of 2025, you could earn as much as you want to, and that's not going to impact social security when you turn social security on in May. In May and beyond, that's where the earnings limit comes into play. So more on that in just a second.
Speaker 1:But the things that I'm going to walk through today are what's the difference between the social security earnings limit and the social security wage base? On top of that, I'm going to talk about what you need to know in terms of what is your max social security benefit, what are the provisional income amounts and what are bend points, and what impact do they have on what you're going to receive from social security. If you've never heard these terms before, that's okay. I'm going to break them down to very simple things, just to talk about what you need to know in order to actually maximize your benefit.
Speaker 1:Let's start by addressing in more detail David's specific question and talk about what the social security earnings limit is. What it is is if you are collecting social security before your full retirement age and this is the key here if you're collecting your social security benefit before your full retirement age, social security will begin withholding benefits from you to the degree that your income exceeds the earnings limit for that year. In 2025, that number is $23,400. And to break it down further, technically what it is is it's $1,950 per month, which comes out to $23,400 per year. I'll tell you why that distinction is key in just a second here. But once you hit that earnings limit, every $2 that you earn above that, social security withholds $1 from your annual benefit. So, for example, if you earn exactly $33,400 and you are collecting Social Security before your full retirement age, social Security looks at that and says that number is exactly $10,000 above the earnings limit of $23,400. $10,000 above, we're going to withhold $1 from your benefit for every $2 above that limit that you are. Therefore, we're going to withhold $5,000 from your social security benefit for this year. This is why, when you're applying for social security benefits, if you're under full retirement age, they will ask you what do you expect to earn this year? Because they might withhold these benefits along the way. If you estimate an amount that you're going to earn and it exceeds the earnings limit, or if you don't, if you earn more than you told them that you're going to earn, that would be money that you have to pay back to Social Security.
Speaker 1:Now, if you are earning money in the year in which you turn your full retirement age. So, for example, let's assume that your full retirement age is 67, to use a round number, and you turn 67 on July 1st of this year, if you're collecting Social Security between January and June of that year, you still have benefits withheld if you're over the earnings limit, but the earnings limit increases the year in which you turn your full retirement age. That limit for 2025 is $62,160. Or, more specifically, it's $5,180 per month. Again, I'll tell you why the monthly amount actually matters more. So in this example, if you are earning above that amount in the first six months, there's a higher threshold and once you exceed that threshold, social Security begins to withhold $1 for every $3 of earnings you have in excess of that limit. Now, once you finally turn full retirement age, you can earn as much money as you want to. You're not going to have your social security benefit impacted. Now it might impact how much of your social security benefit is taxable, it's a completely different conversation. But it's not going to have social security withholding any of your benefits because of earnings that you have outside.
Speaker 1:A few things to note with this. When we're talking about earnings, this is specifically wages. It's not counting pensions, it's not counting income from investments, it's not counting capital gains, anything of that nature. It's just wages. So you could have a solid pension, you could have dividends, interest, real estate income, all these different types of income. That doesn't impact that. That's not what we're talking about. What we're talking about is if you're working in a job where you earn wages, those wages are what are counted against this. Now, I mentioned before that it's actually the monthly numbers we care more about when we're looking at the annual earnings limit. The reason we care about the monthly numbers is that's actually what Social Security is looking at.
Speaker 1:Going back to David's question if he's going to start his Social Security benefits early, so before full retirement age and again, that's the only situation where the earnings limit even exists after full retirement age. Earn as much as you want. If he's going to collect Social Security early, but he's going to do so, say, starting in May, he can earn as much as he wants to earn from January, february, march and April Zero impact on his Social Security benefit. It's only the income that he's earning on a monthly basis from there on out. There on out, meaning from the start of his Social Security benefit and onward. That's the amount that we actually look at. So instead of looking at the annual amount, the annual earnings limit of, say, $23,400, he'd be looking at the monthly limit, the $1,950, and that's what he wouldn't want to exceed from the time that his benefit starts, going forward for the rest of that year. So that's the Social Security earnings limit, but that's different from Social Security wage bases, and sometimes people get those confused.
Speaker 1:So let's talk about Social Security wage base and what that means, and before we do, make sure that you subscribe, if you haven't done so already. Every single week, we're releasing multiple pieces of content to help you create a better retirement. Subscribe now to make sure you don't miss that. So, social Security wage base, what does that mean? Well, for this year 2025, the Social Security wage base is $176,100. What that means is that's the amount that you're paying Social Security taxes up to, or you're paying them up to, that threshold.
Speaker 1:Let me explain how that works. So, when you have your wages, you pay federal taxes and state taxes, and those are the taxes that most of us think about. What we don't think about, but are actually a pretty big component of the taxes that we pay, are called payroll taxes. Payroll taxes are FICA taxes, if you see F-I-C-A. What that really is is that's social security and Medicare taxes. That's how Medicare, that's how social security, is funded.
Speaker 1:The amounts are 7.65% of every dollar that you earn up to a limit, you are paying to fund social security and Medicare. Now, at the same time, your employer is matching that. So, if you earn $100,000 per year, you have federal taxes, you have state taxes. Then you have $7,650 of taxes to fund Social Security and Medicare. Your company makes matching contributions. So it's a total of 15.3%. Of that 7.65%, though, 6.2% is going to fund Social Security, 1.45% goes to fund Medicare.
Speaker 1:Now you may say I don't care where they're going, it's just the total 7.65%. Well, you do, because the wage base is what cuts off at $176,100. You pay Social Security taxes up until that wage base. So for 2025, in the first $176,100, you are paying the full 7.65% of every dollar up until that wage base. From there on out, you are still paying the 1.45% in Medicare taxes. Your employer is still matching the 1.45% in Medicare taxes, but there's no more social security tax beyond that.
Speaker 1:So that is what the wage base is, and that matters for a couple reasons. Number one if you are a higher earner than that, you might notice that your paychecks go up at the end of the year. The reason your paychecks go up at the end of the year is because you've maxed out your Social Security earnings and from there on out until the end of the year, you have an additional 6.2% hitting your bank account because it's no longer going to fund social security. Number two the second reason this is going to apply to you is if you want to know how you max out your social security benefit. You max out your social security benefit. One of the ways that you do so is by maxing out how much you pay into social security. Now there's a cap on how much you can receive from social security, and that's because there's a cap on how much you pay into social security. So that's the cap on what you pay in in every single year. That's adjusted.
Speaker 1:Now one of the things that's going to be interesting to follow in the coming years is they are talking about ways to say how do we preserve the solvency of Social Security. There's some pretty significant pressures on the Social Security system. One of the ways, one of the things that's very likely that they're going to do, to help alleviate that issue is do something with this wage base, either increase it quite a bit or even do away with it, depending upon what solutions they ultimately come up with. But that Social Security wage base talks about what portion of your income are you paying Social Security taxes on? Above that, you still pay Medicare taxes, but below that, that's what your Social Security benefit is based upon and that's the amount you're paying taxes on.
Speaker 1:The third thing that's important to know about Social Security is it's important to know what is the max amount that I can earn, and you probably know that you can collect Social Security as early as age 62. You can delay it as long as age 70. And every single year that you wait, your benefit goes up. That's part of the factor that determines how much you receive in Social Security. The other part, though, is how much did you pay into the system to ultimately get those benefits at some age between 62 and 70? Because there's a cap on how much you pay in. Like I talked about, there's also a cap on how much you can receive At age 62,.
Speaker 1:The highest benefit that you can receive in 2025 is $2,710. I don't care how much money you earned before age 62, that's the highest. Your benefit will be at that age, assuming you maxed out 35 years of earnings. Now I'm going to talk about why that 35-year number is important. I actually created another video to walk you through that, so you can maximize your benefit. I'll link to that at the end, but that's the max benefit at age 62. At full retirement age, which, for a lot of you, is between age 66 and 67, the max benefit that you can receive is $4,018 per month. And at age 70, if you delay all the way until then the max benefit that you can receive is $5,108 per month. Now, all three of those numbers at 62, full retirement age and 70 are assuming you've maxed out what you've paid into Social Security but that's some helpful context to know what's the most you could be eligible for as you start strategizing ways to increase your Social Security benefit, which is ultimately the way you strategize to increase your retirement income for the rest of your life.
Speaker 1:Now those are your individual maxes, and most of you might be aware of that. There's also what's called a family max, though the family max is typically somewhere between 150% and 180% of the amount you're eligible for at your full retirement age. What does family max mean? Well, what it means is it's the most money that your family could potentially take in, based upon one individual's earnings record. So, for example, if I had my social security benefit and then my spouse was collecting a spousal benefit and then I had child's benefits because my children were a certain age while I was social security eligible, there's a family maximum as well. So those are the individual maxes. I talked about the family max, a little bit more complicated to determine, but somewhere between 150 and 180% of your full retirement age benefit.
Speaker 1:The fourth set of social security tiers that you need to know is something called provisional income. Now, if you're thinking this is overwhelming, why are there so many limits? You're exactly right. There's a lot, but understanding these is key to maximizing the benefit that you're eligible for. So provisional income is interesting. Provisional income is the way that you determine how much of what you receive from social security is subject to taxes.
Speaker 1:Now, every state treats social security differently. Most states don't tax it at all, but what we're talking about is at the federal level. At the federal level, a maximum of 85% of your benefit is included in your taxable income. Where does that 85% come from? Well, there are different tiers to where anywhere between 0%, 50% and 85% or some blended amount of that of your social security benefit is going to be included. Here's what those numbers are.
Speaker 1:If you're single and your provisional income is less than $25,000 for the year, 0% of your Social Security benefit is included in your taxable income. Aka, your Social Security benefit is tax-free, at least at the federal level, and likely at the state level, depending on the state that you live in. If that provisional income is between $25,000 and $34,000, then up to 50% of your social security benefit is included in your taxable income, and if that number is above $34,000, if provisional income is above $34,000, then up to 85% of that is included in the income that you are taxed on. If you're married, those numbers are different. Anything below $32,000 in provisional income, in zero dollars of your social security benefit is taxable. Between thirty two thousand and forty four thousand, up to fifty percent is included, and above forty four thousand dollars and up to eighty five percent of your social security benefit is going to be included in what you pay taxes on.
Speaker 1:So important to understand that information so that you can understand how social security is taxed. Probably one of the most key pieces of information to know about all of this when it comes to provisional income is those numbers unfortunately, are not indexed to inflation, which means that as income goes up each year from social security, from pensions, from investment income, whatever that might be, over time, fewer and fewer people get to take advantage of these lower provisional income tiers because they're not indexed for inflation. So that's the fourth social security limit that you need to know, and the fifth one is what are called social security bend points. I'm going to tell you what the bend points are and I'm going to explain why they matter, and why they matter in a big way when it comes to determining how much you'll get from social security.
Speaker 1:For 2025, the first social security bend point is $1,226 of monthly earnings. Okay, the second bend point is between $1,226 and $7,391. Then, finally, the third bend point is any amount above that $7,391. What on earth does that mean? Well, within the first bend point, any of those monthly earnings that you have 90% of those earnings go into the calculation to determine how much you're eligible for in Social Security at your full retirement age. Within that second tier, the second bend point, 32% of those monthly earnings are used in the calculation to determine how much you're eligible from Social Security at your full retirement age. In anything in the third tier, 15% of those dollars are included in the determination of how much you're eligible at your full retirement age.
Speaker 1:So what this is telling us is, as you can see, is Social Security's means tested. You're going to receive a larger dollar amount the more that you earn and the more that you pay into Social Security, but that dollar amount from Social Security is going to be smaller relative to your overall income in the grand scheme of things. So this is part of the Social Security safety net philosophy of the lower earners. You're going to have a higher benefit relative to your earnings to help support you in retirement. Higher earners, yes, a dollar amount of your benefit is going to be higher, but it's going to be a lesser percentage of what you've paid into the system.
Speaker 1:But understanding these bend points is important. I'm going to link to another video at the end of this. Like I said, that shows you how you can maximize your benefit when you understand this information. But what you can see is those first earnings, the first $1,226 per month of earnings, that's most impactful in the calculation of your social security benefit. This is hugely important for people who are thinking of maybe transitioning to part-time work in retirement because, depending on how many years of service you have where you've paid into social security, those final few years of part-time work yes, that income is great, but they also might play a pretty significant role in disproportionately impacting in a positive way how much you're eligible for in Social Security. So those are five thresholds, five limits you need to be aware of when it comes to Social Security. At the end of the day, we all just want to know how can we maximize our Social Security benefit. Well, taking this information, I created this video here. It talks about four simple things that you can do to maximize your social security benefit. Take a look, watch that video so you can see what you can do to create a more secure retirement shown.
Speaker 1:Any testimonials and endorsements shown have been invited, have been shared with each individual's permission and are not necessarily representative of the experience of other clients. To our knowledge, no other conflicts of interest exist regarding these testimonials and endorsements. Hey everyone, it's me again for the disclaimer. Please be smart about this. Before doing anything, please be sure to consult with your tax planner or financial planner. Nothing in this podcast should be construed as investment, tax, legal or other financial advice. It is for informational purposes only. Nothing in this podcast should be construed as investment, tax, legal or other financial advice. It is for informational purposes only. 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.
