Social Security took a cut out of every paycheck we ever earned, and the money was used to pay benefits to our grandparents, parents and older siblings. Now, finally, it's our turn, and it's only natural that we want our benefits, too. Yet the rules for collecting Social Security are incredibly complicated, and vary depending on your marital status, how long you worked, where you worked and when you retire.
Meanwhile, we hear dire predictions that Social Security is running out of funds, benefits will be cut and eligibility rules may change. Nobody knows what the long-term future holds, but under the current program, which is not likely to change much in the near term, there are six proven strategies to make the most out of the program:
1. Work a long time. Social Security says it figures your benefit by calculating "your average indexed monthly earnings during the 35 years in which you earned the most." So, obviously, one way to maximize your benefit is to put in a full career, working for 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 of us), you can still get the maximum benefit even if you didn't start your career until you were 31, or 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, currently $113,700 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 is was $51,300. This is 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 $113,700 today, you're eligible to collect the maximum benefit from Social Security.
3. Don't retire early. Workers are eligible to start taking Social Security benefits at age 62, but the amount you receive at 62 is discounted by about 25 percent. Also, if you start Social Security before full retirement age, and you earn more than $14,160 per year, the government starts temporarily withholding your benefits. Conversely, if you work beyond full retirement age, you receive a bonus of approximately 7 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 benefits are 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 benefits are 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. Don't get upset; that's the one progressive aspect of Social Security. But there is one way around it: don't get married. Two singles can earn up to $50,000, instead of $32,000, before their benefits are subject to federal income tax.
5. Live in a tax friendly state. There's not much you can do to avoid federal taxes unless you take a vow of poverty, but you can do something about state tax. 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.
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, but how long you stick around to collect benefits. You can work all your life, but if you die the day after you retire, all is lost. The best way to maximize Social Security is to eat right, go to the gym, get your annual checkup and in every other way take care of yourself so you can continue to collect that monthly benefit through your 70s, 80s and 90s.
Tom Sightings is a former publishing executive who was eased into early retirement in his mid-50s. He lives in the New York area and blogs at Sightings at 60, where he covers health, finance, retirement, and other concerns of baby boomers who realize that somehow they have grown up.