Making the Most of Your Social Security Benefits

Social Security formsIt was too good to last. For years, I (and every other financial expert on the planet) was able to tell people that they could tap Social Security at age 62, pay the money back later on – no interest required – and draw a higher payout years down the road. It was perfect. In effect, a no-cost loan from the government, making up for all those years you let Uncle Sam hang on to more of your tax dollars than he was entitled.

Well, those days are gone – or at least they've been minimized. New rules from the Social Security Administration put a cap of a single year on the amount of time you have to apply, pay back and apply again. It's not worth the trouble. But strategizing to get the most you possibly can from Social Security – a key part of most retiree's paychecks – is worth more time and energy than many people give it. Here are a few tactics to keep in your back pocket:
  • Delay, delay, delay. For each year you hold off collecting Social Security, your payment goes up by about 8%. On top of that, the amount is also usually (though not this year, or last) topped up for inflation. That means you could feasibly get a 9%, 10% or even 11% increase for each year you wait. If you can hold off until you reach full retirement age at 66 or 67 (depending on when you were born), great. Wait until you're 70 and that's even better. In fact, quick math reveals that depending on how your retirement accounts are allocated, you may be well advised to spend down your own investments before tapping into Social Security, because few investments can be counted on to provide a yearly guaranteed return that large. Your spouse will see even more of a reduction in benefits than you will if you begin collecting at 62. He or she could lose up to 35%, or $175 from a $500 monthly check. Check out this chart, from the Social Security Administration, that shows what your benefits, and a $500 spousal benefit, would be reduced to if the retiree takes benefits at age 62 instead of full retirement age.
  • Maximize what you're owed. The amount you receive from Social Security is based on the earnings you've received throughout your time in the workforce. First, the administration adjusts the earnings to account for changes in average wages over time, and then they average your 35 highest-earning years. This is why if you retire early and only work from ages 22 to 50, for example, your Social Security benefit may decrease because those seven years when you're not bringing in a paycheck will be factored in as $0 income, dragging your overall average down. Staying in the workforce ups your eventual payout.
Watch how much you work. If you're under full retirement age, $1 will be deducted from your benefit for every $2 you earn above the annual limit, which is set at $14,160 for 2011. That's your gross, not net, wages when making these calculations, which means your full salary, before deductions for taxes, insurance and 401(k) contributions. Unfortunately, there is no way to get around this. But my advice to you, if you'd like to continue to work, is to delay taking your benefit, if at all possible. Not only does your benefit see a hefty increase for each year you put off taking it until you reach age 70, but if you're going to be losing a portion – or even all – of your money anyway, you're better off waiting.
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