By Boyce F. Lowery, CLU, ChFC
Last month we gave a broad overview of the Social Security program and the benefits it offers. We also covered eligibility and how benefits are calculated. Today, we are going to go into more depth on how to maximize your Social Security benefits and some of the strategies involved in optimizing everything the program has to offer.
When to File for Benefits
When you choose to file for retirement benefits can have a huge impact on your overall finances. While there is no way to know what the future holds, taking some time to analyze your situation can make a significant difference in your overall lifetime benefits.
You can choose to begin receiving your benefits anytime between ages 62 and 70. The earlier you begin receiving benefits, the lower your payment will be. Here are some things to consider when deciding when to file for Social Security retirement benefits:
- Life Expectancy. If you only expect to live until age 72, it doesn’t make sense to wait to receive benefits until age 70. Those with a shorter life expectancy receive more if they take their benefits earlier, and those that expect to live longer will receive more overall the longer they wait.
- Financial Situation. Many people take their benefits early because they need the money to live on. It is better to take a lower benefit earlier than to rack up debt just to hold out for a higher Social Security payment. However, if you can afford it, it may be worth your while to wait.
- Health. Poor health may make it more beneficial for you to start receiving benefits earlier while good health may enable you to put it off.
- Work History. If you have not worked a full 35 years or are in your highest earning years, it may be wise to put off filing for benefits while you improve your work history and, therefore, your ultimate monthly benefit amount.
- Marital Status. Being married provides extra opportunities for maximizing benefits. We will discuss those opportunities below.
According to the Social Security Administration, benefits are calculated so that the average worker living his expected lifespan will receive the same amount during his life regardless of when he chooses to begin receiving benefits. However, most people are not average and should take the items mentioned above into consideration when deciding when to file for benefits, especially married couples.
Considerations for Married Couples
Married people have a greater opportunity to maximize their benefits than do single people because of the availability of spousal benefits. Spouses are entitled to half of their spouse’s benefit or their own benefit, whichever is higher. That means that for couples where there is a large difference in their earnings history because of career choices or because one stayed home with the kids, the spousal benefit could be more than the person’s individual benefit.
In such cases, it is often wise for the higher-earning spouse to wait as long as possible to file for benefits in order to maximize the benefit. The spouse with the lower benefit can begin receiving payments early and then transition to the higher spousal benefit when the high-earning spouse takes their benefits.
This is also very important when the lower-earning spouse expects to live longer than the higher earner. When the high-earning spouse dies, the surviving spouse receives their deceased spouse’s full benefit, which is twice the spousal benefit they were receiving. They will then receive that higher benefit for their entire lifetime. In this way, the higher-earning spouse’s benefit outlives them and provides for their surviving spouse.
How Benefits Are Taxed
Another thing that you must consider is taxes. Whether or not you have to pay taxes on your Social Security benefits depends on your Combined Income and whether you file your taxes as single or on a joint return. Your Combined Income is your adjusted gross income plus any non-taxable interest you earned plus half of your Social Security benefits.
Social Security benefits are not taxed for single filers with a Combined Income under $25,000. When Combined Income is between $25,000 and $34,000, up to 50% of benefits are taxed. Up to 85% is taxable with a Combined Income of over $34,000.
For married filers, taxes are due on Social Security retirement benefits starting at a Combined Income of $32,000. Social Security retirement benefits are taxed up to 50% up until $44,000 and up to 85% are taxable with incomes above that.
One way to manage the taxation of your Social Security benefits is to consider from where you draw your other income. This very important management of taxes is only possible if you have a combination of taxable and non-taxable places from which to take income during retirement. Taxable retirement accounts could include sources such as traditional IRAs, 401(k)s, SEP IRAs, Profit Sharing, SIMPLE or a Defined Benefit Plan. Tax free cash flow could come from a Roth IRA, tax free municipal bonds or life insurance cash value withdrawals or policy loans. You can balance your receipt of cash from each source to control your taxable income and thereby limit your tax liability. This management of taxable income also becomes very important to limit how much you will be charged for Medicare Part B and potentially Part D as well.
As you can see, receiving Social Security benefits isn’t as simple as it sounds. There are a lot of decisions that must be made that can have a great influence on your overall benefit amount and the taxes thereon. If you have questions about Social Security or want help maximizing your benefits while minimizing taxes, call us at Suncrest Advisors at 888-827-0146.
Boyce Lowery is a 40-year veteran and established expert in the insurance industry. As the managing partner of Suncrest Advisors, he, his partner, and their associates all aim to provide financial security and peace of mind to business owners, executives and professionals, and high net-worth individuals across the United States. Along with more than four decades of experience, Boyce is a Chartered Life Underwriter® (the premier designation for insurance professionals signifying specialized knowledge in life insurance and estate planning) and a Chartered Financial Consultant® (known as the advanced financial planning designation). To learn more, visit http://suncrestadvisors.com/ or connect with Boyce on LinkedIn.