Social Security—Secrets to Max Out Your Future Benefits

Laura interviews a Social Security expert about how the program works and what you need to know even if you're nowhere near retirement age. They discuss who's eligible for benefits, pros and cons of taking early retirement, how to avoid expensive Social Security mistakes, and the future of the program.

Laura Adams, MBA
8-minute read
Episode #508

4.    Not Considering the Earnings Test

As financial professionals, we’ve made a lot of progress over the last few years. Not long ago government statistics indicated that 70 percent of people were taking Social Security at age 62. That number has dropped considerably in recent years.

The so-called “earnings test” is one good reason for waiting that people often miss. Of course, your benefit will be actuarially reduced if you apply any time before your Full Retirement Age. If you go at age 62 you’re getting 75 cents on a dollar.

But there’s more to it than that. You will be subject to a further reduction if you keep working. And it’s a steep one. If you earn more than $16,920 in wages, you will get a reduction of $1 for every $2 over the limit. (Note that you may get some of that money back starting at your Full Retirement Age, but that’s a topic for another day.)

Too often it happens that someone retires at 62 but gets bored, and quickly changes their mind about working. Just realize that this can have an adverse effect on your Social Security benefit.

Too often it happens that someone retires at 62 but gets bored, and quickly changes their mind about working. Just realize that this can have an adverse effect on your Social Security benefit.

5.    Trying Too Hard to Maximize Your Benefit

According to figures provided by the Social Security Administration, the maximum benefit for someone who turns 66 in 2017 is $2,687 per month. Many people we talk to are close to the maximum but not quite there yet. Is it worth getting all the way to the top, even if it means working an extra year?

Well, in many cases the answer is no. Keep in mind the cost of Social Security: 6.2 percent of wages up to $127,200, plus another 6.2 percent thrown in by the employer. If you make the max, that’s $7,886 apiece—per year.

Add to that the complicated formula used to figure out the benefit—which counts your 35 highest years of earnings and is designed to be more favorable to low-income taxpayers. So your $7,886 “investment” may not get you much of a return (i.e., increased Social Security benefit) at all. And it’s even worse if you’re self-employed.

It is, of course, more complicated than all that, but in general, for a high-income earner, an increased Social Security benefit is not going to be much of an incentive to keep working.

Bonus: Not Considering Other Sources of Retirement Income

Understand that the “Deferred Retirement Credits” (DRCs) are a big part of Social Security planning. Every year you wait beyond your Full Retirement Age (FRA), your benefit goes up by 8 percent.

For example, as noted earlier, if your monthly benefit is $2,000 and your FRA is age 66, you would get $2,640 per month if you waited until age 70. That’s an enticing bonus. That monthly increase would apply for the rest of your life.

But suppose you’ve already decided to retire at age 66. Now what? Too many people in that situation apply for Social Security at that age when they don’t have to. It might make more sense for some of these people to use another source (maybe their 401(k), savings, or a life insurance policy) to fund those first four years, then switch to a maxed-out Social Security benefit at age 70.

This is something that many people miss. If they’re going to retire at 66 with, let’s say, $6,000 a month of projected income, they would normally take their $2,000 from Social Security and the other $4,000 from other sources.

It never occurs to them to take, if possible, money from those other sources for the first four years to take full advantage of those DRCs.

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Close-up of Social Security Cards image courtesy of Shutterstock


About the Author

Laura Adams, MBA

Laura Adams received an MBA from the University of Florida. She's an award-winning personal finance author, speaker, and consumer advocate who is a frequent, trusted source for the national media. Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers is her newest title. Laura's previous book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show.

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