How You're Reducing Your Social Security Benefit

By Emily Brandon

The career and finance decisions you make while working will ultimately determine your future Social Security benefit. While there may be valid reasons for choosing a lower-paying job or spending a few years out of the workforce, those decisions will eventually result in a lower Social Security check in retirement. Here are some of the ways you may be inadvertently reducing your future Social Security benefit:

Don't work at least 35 years. The 35 years in which you earn the most are used to calculate your Social Security benefit. If you work for more than 35 years, each higher-earning year cancels out a year when you earned less in the calculation. However, if you don't work for at least 35 years, zeros are averaged in, which lowers your benefit in retirement. "If you have gaps because you have been laid off or a housewife or someone who stayed home to raise children or you're an entrepreneur, filling up your earnings history will add to your benefits in the formula," says William Meyer, founder and managing principal of Social Security Solutions, a company that analyzes Social Security claiming strategies.

Fail to maximize your earnings. Most workers pay 6.2 percent of each paycheck into the Social Security system up to $117,000, and employers contribute a matching 6.2 percent. If you can boost your salary by asking for a raise or switching to a more lucrative job, you will pay more taxes into the system and subsequently get a bigger payout in retirement. However, once you earn more than $117,000 in 2014, you will no longer pay Social Security taxes on that income or have that portion of your salary factored into your retirement benefit. The tax cap is adjusted each year to keep up with inflation.

Sign up before full retirement age. You are eligible to collect the entire Social Security benefit you have earned at your full retirement age, which it typically age 66 or 67, depending on your birth year. If you claim a benefit before your full retirement age, it will be reduced for early claiming, depending on how much earlier you sign up. For example, a worker with a full retirement age of 67 will receive 30 percent smaller monthly payments if he signs up at age 62 or 13.3 percent smaller payments if he signs up at 65. Conversely, you can also increase your benefit for each month you delay claiming Social Security up until age 70.

%VIRTUAL-WSSCourseInline-734%Forget to coordinate benefits with your spouse. Members of married couples are eligible for spousal payments that can be worth as much as 50 percent of the higher earner's benefit. However, spousal payments are reduced if you first claim them before full retirement age. Spouses can also claim strategically to maximize their benefits as a couple. For example, members of married couples who are full retirement age or older can claim a spousal benefit and then later switch to payments based on their own work history, which will have increased due to delayed claiming. Divorced individuals are also eligible to claim spousal payments if the marriage lasted at least 10 years.

Don't factor in survivor's benefits. When one member of a married couple dies, the surviving spouse is entitled to receive the higher earner's payments. The higher-earning spouse can increase the amount his or her surviving spouse will receive by delaying claiming. Consider a 68-year-old doctor who is diagnosed with terminal cancer and thinks he only has a year or two to live. If he is single, he might want to sign up for Social Security as soon as possible so that he gets some money from the system before he passes away. However, if he is married, signing up for Social Security at age 68 will reduce his wife's future widow's benefit by 16 percent, according to calculations by Laurence Kotlikoff, a professor of economics at Boston University and a co-developer of the retirement planning software ESPlanner. But he could also boost the amount of money his wife will receive after he passes away if he continues to delay claiming, as long as he can up until age 70. "The delayed retirement credits the doctor would accrue between ages 68 and 70 would extend to the wife in the form of a higher widow's benefit," Kotlikoff says.

Continue to work after signing up for benefits. If you work and claim benefits at the same time when you are younger than your full retirement age, part or all of your Social Security payments will be temporarily withheld. Social Security beneficiaries age 65 and younger in 2014 who earn more than $15,480 will see $1 deducted from their Social Security payments for every $2 earned above the limit. For people who will turn 66 in 2014, the earnings limit jumps to $41,400 and the amount withheld declines to $1 for every $3 earned above the higher limit. However, once you turn your full retirement age, the earnings limit no longer applies and your payments will be increased to reflect the withheld benefits. "At the full retirement age, Social Security not only stops withholding benefits but increases monthly benefits to replace those taken by the earnings test," says Andrew Biggs, a resident scholar at the American Enterprise Institute and a former deputy commissioner of the Social Security Administration. "The earnings test delays benefits but does not tax them away."

Paying tax on your Social Security benefit. Some people have to pay taxes on part of their Social Security payments. "The worst case is 85 percent of your Social Security benefit is taxable," says Andy Landis, author of "Social Security: The Inside Story." "Social Security taxation is triggered by having certain kinds of income over the threshold." If the sum of your adjusted gross income, nontaxable interest and half of your Social Security benefit is more than $34,000 ($44,000 for couples), as much as 85 percent of your Social Security benefits could be taxable. If those sources of income total between $25,000 and $34,000 ($32,000 and $44,000 for couples), up to half of your benefit may be taxable. Some people are able to avoid paying tax on their Social Security benefits by keeping their taxable retirement income below those thresholds. "If I am living on my IRA and Social Security and I have a Roth, if I pull out thousands of dollars in IRA withdrawals, half of my Social Security benefits are going to be taxed, but if I pulled out a few thousand from my Roth instead, then none of my Social Security would be taxed," Landis says. "If I can tune my income to keep it under those thresholds, then I can tune which years I have to pay income tax on my Social Security."

Emily Brandon is the senior editor for Retirement at U.S. News. You can contact her on Twitter @aiming2retire, circle her on Google Plus or email her at ebrandon@usnews.com.