I recently viewed a clip of a young woman ecstatically ripping open an envelope containing her first-ever paycheck, only to become crestfallen once she saw the amount of money that had been deducted for taxes.
While most of us, even as teens, probably had a sense that taxation awaited, I too remember feeling defeated by how much money was taken out of my first paycheck.
That said, some of those payroll taxes (think Social Security) do come back to us later in life.
While not every approach below will work for all readers, what follows are three strategies to not only boost your future Social Security payments, but to help heal the emotional scars from the shock of that first paycheck.
Work a full 35-years
It takes a minimum of a decade (40 quarters) of work – which do not have to be consecutive years – to become eligible to receive at least some Social Security. And, if you so choose, and you have worked at least 10 years, you can begin collecting Social Security as early as age 62.
But consider that your benefit amount is calculated based on:
- Your highest 35-years of income
- The age at which you apply
Now, consider that your Social Security payout calculation will average in a ZERO for every year under 35 years that you have no taxable income. (For instance, if you worked for 15 years, even if you were a high earner, you will still have 20 years with zero income averaged in, and this may drastically lower your benefit amount.)
Forgetting about the above for a moment, for every year you wait to apply for Social Security – after the age of 62, but up until age 70 – your benefit amount increases.
So, while income and work history are big factors, what sort of benefit ratio increase am I referring to for those who wait to apply?
For 2023, the absolute maximum benefit amount you can earn at key ages are:
- Age 62: $2,572
- Age 66: $3,506
- Age 70: $4,555.1
Quick tip: Every person’s situation is unique, so speak with your fiduciary advisor. But because zero income years are so costly, even if you only get a part-time job to fill in those zero-income years, and even if your income is low, generally, hitting that 35-years of income mark will raise your benefit amount.
Also, as we advise our clients – because legislatively, or in terms of health, no one can really know for sure what the future holds – sometimes it is the folks who do not need Social Security who should apply early.
Apply for benefits via your spouse’s or ex-spouse’s work record
If you are married, or you were married, depending on your work history and income, you may be eligible for a higher Social Security payout amount if you apply based on your spouse’s (or ex’s) work history and not your own.
This is a scenario where you are absolutely going to have to crunch the numbers to see which amount is higher. But a spousal benefit amount can be as high as 50% of your spouse’s total benefit.
Quick tip: The above approach does not in any way impact your spouse’s Social Security payout. So, in a real sense, in this situation, you are working with your spouse to determine the higher combined Social Security income amount. And when it comes to applying on your ex’s work history, which is something that some folks worry about doing, let me clearly state that he or she will never know. It does not show up on their statements, they don’t have to sign off on anything, and it absolutely does NOT impact their Social Security income in any way.
The only caveat is that you cannot receive a benefit based on your ex’s work history if you are remarried.
Watch for mistakes, tax-bracket bumps, and monitor your other income
Among the most confusing aspects of Social Security – and that is saying something – revolves around taxation. About 40% of people who receive Social Security must pay taxes on up to 85% of their benefits because their other income bumps them over the IRS’s limits.2 Now, if you earn enough non-Social Security income, you might not care. But there’s still a science that is unique to each individual to planning out taxation from retirement account distributions, or other investments, so you can space out income over years to help keep your total tax burden as low as possible.
Another key to the Social Security taxation consideration is that while some states simply use the federal provisional income taxation approach, thirteen states use their own formula.2
Lastly, do not assume your Social Security statement is accurate. While the SSA claims that “only” five percent of statements have ever had identifiable errors3, most people never review their statements, so the actual number could be much higher. For example, according to CNBC, one long-time advisor recently estimated that 25 percent of the statements he’s reviewed had costly errors in them.4
Properly braiding other income with Social Security is important from a taxation, estate, investment, and income distribution and planning perspective. When you consider that there are 81 unique Social Security filing considerations for couples, and that applying at precisely the best time for your unique financial situation could add tens of thousands of dollars in income to you over the course of your retirement, you can hopefully begin to appreciate why ongoing, holistic guidance and ongoing analysis of your unique situation is an important part of your overall financial health.
1 9 Ways to Boost Your Social Security Benefits (investopedia.com)
2 How taxes can affect your Social Security benefits | Vanguard
3 How taxes can affect your Social Security benefits | Vanguard
4 Check for errors in your Social Security statements (cnbc.com)
