Friday, May 20, 2022

How To Raise Your Social Security Benefits

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The Source Ofand Solution Tothe Problem

Here’s how different salaries can drastically raise or lower your Social Security benefits

When the current Social Security formula was put in place in 1977, no provision was made for the contingency that economic conditions would be so dire that average wages would fall in any given year. This problem first surfaced in 2009 during the Great Recession. The AWI, however, fell by a relatively small amount, and policymakers chose not to do anything about it. As a result of the COVID-19 pandemic, however, the decline in the AWI is likely to be about four times as big now as it was during the Great Recession.

There is ample precedent for fixing this problem. The first precedent concerns Social Security cost-of-living allowances . As mentioned above, payments in years after beneficiaries first year of retirement are indexed to inflation using a version of the consumer price index . However, under the law, if prices fall in any year, benefits are not adjusted downward rather, they remain the same. The second precedent concerns the Social Security contribution and benefit base, also known as the taxable maximum. The taxable maximum is the dollar amount of annual earnings above which the Social Security payroll tax does not apply. The taxable maximum is indexed to the AWIbut like COLAs, it is never adjusted downward.

Do Not Rely On Social Security Alone

Its too soon to predict exactly what raise seniors on Social Security will be in line for in 2023. But its also fair to say that no matter what it is, it probably wont be enough.

In fact, the limited power of COLAs should be reason enough to motivate todays workers to not rely too heavily on Social Security in retirement, but rather, take steps to build savings of their own. As it is, Social Security will only replace about 40% of the average workers pre-retirement wages. And so retiring on those benefits alone could set the stage for a world of financial hardship.

Contrary to what some might believe, it does not take a lot of money on a monthly basis to build a solid retirement nest egg. Contributing $ 300 a month to an IRA or 401 plan over 30 years could result in a savings balance of about $ 408,000, assuming that money is invested at an average annual 8% return . . Thats a great way to avoid a scenario where inadequate COLAs result in an inability to make ends meet.

The $ 18,984 Social Security bonus most retirees completely overlook

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The Problem: The Economic Toll From The Pandemic Will Very Likely Affect Social Security Benefits

The initial retirement benefits that Social Security beneficiaries receive in the first year of retirement are determined by a formula that depends, in part, on the growth of average wages in the economy. Due to the economic fallout from the COVID-19 pandemic, the key measure of average wagesthe average wage index is very likely to decline in 2020. As a result, the initial retirement benefits for those who are first eligible to receive benefits in 2022when they reach the age of 62would be significantly less than what was anticipated only months ago, before the pandemic began to exact its economic toll. The effect is very likely to be so significant that workers turning 62 in 2022 would receive initial retirement benefits that are less than those of workers who were born a year earlier and who had essentially the same earnings history. This incongruity is what Social Security experts call a benefit notch. Such a notch would be unfair to the beneficiaries who turn 60 in 2020 and first become eligible to retire in 2022 because benefits are normally expected to grow for each successive cohort of retirees. Moreover, the benefit reduction and notch would have long-lasting consequences, as they not only would affect benefits in the first year of ones retirement but also lower them for every year going forward, as annual benefits are determined by adjusting the initial level for inflation.

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Work For A Minimum Of 35 Years

Yes, this is a must.

Its because social security benefits are decided based on those 35 years youd worked the most. Your payout will only end up reducing if you dont work for 35 years.

Its because social security credits you for no income for each year up to 35. So there will be three zeros in your benefit calculation if you worked for only 32 years.

However, if you continue working, then each year you work displaces a zero.

Dont Rely Solely On Social Security

Social Security to raise benefits 1.3% in 2021  recipients ...

Its too early to predict exactly what the increase for seniors on Social Security will be in 2023. But its also fair to say that whatever it is, it probably wont be enough.

In fact, the limited power of COLAs should be reason enough to motivate workers today not to rely too heavily on Social Security in retirement, but rather to take steps to build their own savings. As things stand, social security will only replace about 40% of the workers average pre-retirement wage. And so, retiring with these benefits alone could set the stage for a world of financial hardship.

Contrary to what some might believe, it doesnt take a lot of money on a monthly basis to build a strong retirement nest egg. Contributing $300 per month to a 30-year IRA or 401 plan could result in a savings balance of approximately $408,000, assuming the money is invested at an average annual return of 8% . This is a great way to avoid a scenario where inadequate COLAs lead to an inability to make ends meet.

The $18,984 Social Security premium that most retirees completely overlook

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Apply For Social Security Survivor Benefits

You may also be able to increase your monthly retirement paycheck using Social Security survivor benefits.

If youre widowed and your deceased spouses benefit was higher than your retirement benefit, you are generally able to claim the higher of the two, says Brotman.

Experts recommend higher-earning spouses wait as long as possible to claim benefits, since it can prepare a lower-earning spouse for a bigger benefit as a widow or widower. Unlike spousal benefits, which are based on the unadjusted PIA and when the nonworking spouse chooses to start benefits, survivor benefits are determined by the amount the earning spouse actually received if they die after starting benefits.

When a couple is collecting benefits and one spouse dies, the surviving spouse typically receives the higher of the two benefit payments moving forwardbut not both, says Brotman. That means youll want to consider age disparity, life expectancy, the health of each spouse and the benefit amounts available for each spouse to try to maximize your benefits, both while youre both living and when one of you is widowed.

Wait Until At Least Full Retirement Age

As you can see from the maximum levels above, you can retire as young as 62 and collect Social Security, but your benefits will be reduced by 25% to 30%. For everyone born after 1942, the full retirement age is 66, with two months added for each year after 1954. For those born in 1960 and after, it is age 67.

Its wise to wait until the full retirement age to start collecting to get the highest amount youre eligible to receive. Even better, you can wait even longer and become eligible for delayed retirement credits that increase your monthly payment.

If you wait until you’re 70 instead of 62 to collect benefits, you’ll get an extra 8% a year. When you reach 70, the increases stop.

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Beware The Social Security Earnings Test

Bringing in too much money in earned income can cost you if you continue to work after claiming Social Security benefits early. With what is commonly known as the Social Security earnings test for annual income, you will forfeit $1 in benefits for every $2 you make over the earnings limit, which in 2021 is $18,960. Once you are past full retirement age, the earnings test no longer applies, and you can make as much money as you want with no impact on benefits.

Any Social Security benefits forfeited to the earnings test are not lost forever. At your full retirement age, the Social Security Administration will recalculate your benefits to take into account benefits lost to the test. For example, if you claim benefits at 62 and over the next four years lose one full years worth of benefits to the earnings test, at a full retirement age of 66 your benefits will be recomputed — and increased — as if you had taken benefits three years early, instead of four. That basically means the lifetime reduction in benefits would be 20% rather than 25%.

Seniors Are Already Losing Buyer Power

Here’s how different salaries can drastically raise or lower your Social Security benefits

At first, 2022s 5.9% COLA seemed like a great thing for seniors. But so far, beneficiaries are already losing buying power because the rate of inflation is outpacing their COLA, which theyre limited to for the entire year.

If high levels of inflation persist, seniors could end up seeing a COLA in the 7% range in 2023. But that may not do them much good. Chances are, if that high a COLA comes through, it will simply be wiped out by higher living costs.

Furthermore, Medicare costs have been rising steadily, and thats done a good job of eroding COLAs in recent years. If Medicare Part B premiums increase a lot in 2023, seniors could end up in a serious financial crunch even if their COLA is extremely generous.

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Let Your Family In On Your Social Security Benefits

In addition to your spouse, your minor children who are biological, step- or adopted can receive payments that amount to one-half of your full allocation on a monthly basis. Each individual needs to fit certain parameters to receive these benefits. There is also a limit to the amount your family members can claim based on a workers earnings record. This is also known as a family benefit maximum . This maximum only applies when there are multiple-payment recipients on one record.

How To Boost Your Social Security Benefits By $800

The trick is very specific, you need to wait to claim your benefit until you are 70 years old in order to make the monthly payments increase by about two thirds of 1%, which is an 8% total for each year you wait. This means that if you wait until that age, your monthly benefits will go up to $1,888 just for deciding not to claim it at the start of your legal period. That is a total 24% extra tacked on to the monthly benefit. These credits accrrue through age 69 but work somewhat in the reverse if you decide to take the benefits early.

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How Much Can I Earn If I Work After My Full Retirement Age

If you continue to work after reaching full retirement age, you may work and earn as much as you’d like. You will not be subject to the retirement earnings test, and your Social Security benefits will not be affected.

If you work prior to FRA, you may forfeit part of your benefits if you earn above annual thresholds. However, your benefit amount will be recalculated at full retirement age to account for most of those forfeited funds.

Work Until Full Retirement Age

3 Easy Ways to Increase Your Social Security Benefits ...

Another step you can take to maximize your Social Security benefits is to work until your full retirement age . Originally, this number was set at 65. But it has been steadily creeping up, thanks to the passage of the Social Security Amendments of 1983 . Starting in 2000, the full retirement age has been increasing in two-month increments so that its 67 for people born in 1960 or later.

If you dont wait till your FRA, the earliest you can start receiving Social Security is 62 years old. However, your benefit will be reduced by up to 30% if your FRA is 67 in this case.

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Is Your Full Retirement Age Affected By Where You Live

Your FRA is not affected by where you live. Most Social Security rules, including those that determine benefit amount and claiming age, are set by federal law. However, some states do tax Social Security benefits, so where you live can affect tax levels on your retirement income. But again, the age at which you claim benefits won’t affect your tax rate — your income is the key factor.

Tips For Social Security And Retirement Planning

  • Developing smart Social Security strategies is just one aspect of savvy financial planning. An advisor whos well-versed in Social Security can offer guidance to help you make the most of your benefits. SmartAssets free tool matches you with financial advisors in your area in 5 minutes. If youre ready to be matched with local advisors that will help you achieve your financial goals, get started now.
  • Its never too early to start planning for retirement. A retirement calculator can help you figure out how much youll need to retire comfortably. Building a sizable nest egg may enable you to delay Social Security benefits and maximize your monthly payments once you are ready to collect.
  • Though you probably wont be able to live off them entirely, Social Security benefits are a valuable addition to your retirement income. Check your paychecks and tax documents to ensure you are contributing to the SSA.

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Coordinate With Your Spouse

Finally, if you’re , coordinating with your spouse can deliver bigger benefits, too.

Imagine this scenario: You’re married, and your spouse has generally earned much more than you. You both start collecting benefits as soon as you can, at age 62. You collect, say, $1,800 per month, and your spouse collects, say, $2,300. If your spouse dies first, your household can no longer collect both checks instead, you get the greater of the two, so your benefit rises to $2,300.

But if your spouse had been able to delay starting to collect until age 70, that $2,300 check could have grown by 24% into a $2,850 one. Strategizing with a spouse can be a powerful income-maximizing move.

It’s well worth taking a little time to learn more about Social Security, because it’s likely to provide a meaningful chunk of your retirement income, and it’s worth getting as much out of the program as you can.

Explaining Social Security, TLDR edition: The 8 things you should learn about your benefits

Claim All The Delayed Retirement Credits You Can

Social Security COLA in 2022: How much more money you will see in your benefits every month

Avoiding penalties for claiming benefits ahead of FRA is just the first step in getting a larger Social Security check. If you want the biggest monthly benefit possible, waiting even longer is necessary. Specifically, you’ll need to delay filing for retirement benefits until age 70.

Delayed retirement credits are available to those who wait to start getting checks until after FRA. Like early filing penalties, they’re applied monthly and based on a percentage of your standard benefit. These credits increase your checks by 2/3 of 1% per month or 8% for each full year of delay. They can be earned only until age 70, though.

If you max out the three years of delayed retirement credits available with an FRA of 67, you will end up with a 24% benefit increase, and your standard benefit of $1600 becomes a monthly benefit of $1,984. This is a full $864 per month higher than the checks you’d have received starting at 62. Of course, you’d have given up eight years of potential income to get those higher checks, though, so you need to make sure you’d break even if you go this route.

For most retirees, delaying until 70 ends up being your best bet for bigger monthly checks and more lifetime income. Just be sure you’ve considered both the pros and cons of delaying a claim before you decide that waiting to file for benefits to earn bigger checks is the right choice.

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Eliminated The Stretch Provision

The SECURE Act removed the stretch provision, which previously allowed non-spousal beneficiaries to withdraw the required minimum distributions from an inherited IRA until the account was depleted. Non-spousal beneficiaries must withdraw all of the funds in 10 years following the death of the original account holder, a requirement put in place on Jan. 1, 2020.

Should You Invest In An Ira

Sooner or later when you talk about saving for retirement, someone will tell you that you should set up an IRA. Or maybe theyll encourage you to contribute to a 401 plan. Ill just say this: If you have any reason any reason at all to believe you may need that money in the next 5, 10, 15, or 20 years DO NOT PUT IT IN AN IRA OR 401 PLAN! You should only contribute money you wont need to a deferred-tax retirement plan. If you dont have a savings account, get that going first. If you dont have an emergency fund, get that going first. If you dont own your own home, take care of that first.

If you withdraw money from your retirement plan before youre ready to retire, youll pay a 10% penalty as well as income tax on any non-qualified withdrawal. Most people are caught off guard by this rule when they cannot repay loans or find themselves cashing out of retirement plans due to unexpected expenses.

That is all I will say about deferred-tax investing in this article.

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