Social Security took a cut out of every paycheck we ever earned and used the money to pay benefits to our grandparents, parents and older siblings. Now, finally, it's our turn. It's only natural that we want to get our benefits, too.
The rules for collecting Social Security are complicated and often changing. For example, Congress recently closed two "loopholes" in filing for Social Security. One was called "file and suspend" and the other "restricted application" – both allowing two-income married couples to boost their benefits as one spouse collected while the other's continued to grow, at a rate of about 8 percent a year.
Meanwhile, we hear dire predictions that Social Security is running out of funds. Eligibility rules may change or benefits may be cut. Social Security is supposed to be indexed to inflation, but in the past few years increases have been minimal because government measures of inflation have been so low. The projection for 2017 is no cost-of-living increase at all for Social Security.
Nobody knows what the long-term future holds for Social Security. But under current conditions, there are six proven and non-technical strategies to make the most out of the program. They may not all be easy to do, but they are simple and tried-and-true.
1. Work a long time. Social Security figures your benefit by calculating your average indexed monthly earnings for the 35 years in which you earned the most money. So, obviously, one way to maximize benefits is to put in a full career, working at least 35 years. Maybe that seems like a long time, but look at it this way: If you retire at full retirement age (66 for most baby boomers), you clocked 35 years even if you didn't start your career until you were 31. You would also hit 35 years if you began working at age 21 and took off 10 years to raise children.
2. Have a good job. Social Security sets a maximum amount of salary that is subject to the payroll tax. It's currently $118,500 per year, which is the same amount of earnings it will credit toward your benefit. This amount is adjusted for inflation. The maximum amount in 2000 was $76,200, and in 1990 it was $51,300. It's easier said than done, but the way to maximize your benefit is to earn the maximum amount set by Social Security throughout your career. If you were earning at least $51,300 in 1990, $76,200 in 2000 and $118,500 today, you're eligible for the maximum possible benefit.
3. Don't retire early. Workers are eligible to start taking Social Security benefits at age 62, but the amount you receive is discounted by about 25 percent if you sign up at this age. Also, if you start Social Security before full retirement age and you earn more than $15,720 per year, the government starts temporarily withholding your benefits. Conversely, if you work beyond full retirement age, you receive a bonus of approximately 8 percent a year, up to age 70. There's no extra benefit to working past age 70.
4. Don't earn too much in retirement. If you're married and file a joint tax return, your Social Security benefit is not taxed if your combined income falls below $32,000. Half is taxed if your income is between $32,000 and $44,000, and 85 percent of your benefit is taxed if your income exceeds $44,000. If you had a good career and didn't retire early, you'll likely be subject to the 85 percent rule.
5. Live in a tax friendly state. There's not much you can do to avoid federal taxes unless you have a low income. But you can do something about state taxes. Most states do not levy income tax on Social Security benefits, including retirement havens like Florida, Arizona and the Carolinas. But about a dozen states do exact income tax on your Social Security benefits, including red states like Kansas and Utah as well as blue states like Connecticut and Vermont. (Of course, B and I just moved to Connecticut, but not for long. We can't afford it!)
6. Stay in good health. By far the most important factor in how much you collect from Social Security is not how much you earned, and not when you decided to start benefits -- but how long you stick around to collect those benefits. In other words, the best way to maximize your Social Security is to eat right, get some exercise, make sure to have an annual physical and in every other way take care of yourself so you continue to collect a monthly benefit throughout a long and prosperous retirement.