Social Security is a significant source of income for many of us these days. Given the added annual cost-of-living increase (COLA), it has become a keystone to a successful retirement. Because many people are not aware of some of the lesser-known nuances of this benefit, here are some tips to help you get the most out of Social Security.
Retire in a state that doesn’t tax Social Security
It is a good idea to know whether your state (or the state you are planning to retire to) taxes Social Security. Currently, 13 states tax Social Security benefits. While a number of these states have exemptions for low-income residents, four states do not. And unfortunately, the rules for taxing benefits are not consistent among the states. So -- before you decide where to retire, it is a good idea to do a little research. California does not tax social security at this time.
Stay current on student loans & taxes
Social Security benefits are not protected from student loan default or tax debt. The average affected recipient has the maximum garnishment allowed – 15%. This is a growing problem as 40% of federal student loan borrowers over 65 are in default. The best plan is to work at paying off loans before you retire so you don’t have to restructure your loans in order to keep your full Social Security benefits.
Review your Social Security Earnings Statements
Social Security is based on wage earnings. It is wise to regularly check to be sure your earnings have been correctly reported (or reported at all!). The simplest way is to create an account on the Social Security Administration’s website. Each year at tax time make it part of the process to confirm your income was fully credited.
Work at least 35 years
Social Security benefits are calculated on your highest 35 earning years. Working less than 35 years means there will be some $0‘s which may ultimately reduce your lifetime monthly benefit. Another thing to keep in mind is that the Social Security Administration assumes you work until the retirement date of their estimate. So if you retire in your 50’s and are not a high wage earner, Social Security’s benefit ”estimate” could be higher than what you will actually receive.
Wait until you at least reach your full retirement age
Your benefits can also be reduced if you retire before your Social Security Full Retirement Age (FRA). Age 62 is the earliest you can claim benefits. 70 years old is the maximum Social Security age. For most of us, Full Retirement Age is in the middle -- 66 to 67 years. Retiring at 62 means a cut of about 25% to 30% monthly for life. On the other hand, if you wait past your Full Retirement Age up until the maximum age 70, you will earn about 8% a year (0.66%/month) more in benefits (called Delayed Retirement Credits). Wait the entire 3 to 4 years and your benefit increases from 24 to 32%! So, if you don’t need the cash flow right away and you are in good health, it is usually a good strategy to wait as long as you can before collecting your benefit.
Be aware of benefits for your children
When you qualify for Social Security retirement benefits, your children may also qualify to receive benefits on your record. Your eligible child can be your biological child, adopted child or stepchild. Even a dependent grandchild may also qualify. The rules are the child must be unmarried, under the age of 18 (up to 19 if a full-time student) or 18 & older if disabled before the age of 22. Best of all, the benefits paid to your child will not decrease your own retirement benefit.