Slideshow 10 Tips to Maximize Social Security Benefits for Clients

  • October 29 2013, 11:41am EDT
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10 Tips to Maximize Social Security Benefits for Clients

by Dave Lindorff and Editorial Staff

There is a lot of misinformation and misconceptions about Social Security. But it’s a major government program and anyone over the age of 40, at least, will be dealing with it at some point in their lives. And with a few relatively minor changes, the program could last for generations. So if you don’t know enough about it, now is the time to brush up to help your clients.

<b>Don’t panic over reports that Social Security is going bankrupt</b>

People who warn that the Social Security Trust Fund is projected to run out of money sometime after 2033 often neglect to say that even then, current workers’ FICA taxes would cover 78% of retiree benefits. And meanwhile, with that date still two decades away, there is plenty of time to fix any shortfall.

Example: Eliminating the cap on income subject to the FICA tax.

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<b>Social Security has a death benefit</b>

When a higher-earning spouse dies, the surviving spouse starts receiving a widow’s benefit that is 100% of the deceased spouse’s Social Security benefit. That’s a good reason for the higher earning spouse to wait until age 70 to start collecting benefits. Where else can you get an annuity like that with an inflation clause linked (so far at least), one-to-one to the Consumer Price Index?

This amount will be reduced by a small amount for each month before the widowed spouse’s actual retirement age of 62, but after age 62, the widow may switch to his or her own account.

<b>Maximizing your earnings just before retirement can pay off big in higher Social Security benefits</b>

The Social Security administration calculates your benefit amount in retirement by averaging the top-earning 35 years of your working life, after adjusting earlier years for inflation. What this means is that each year over 35 that you earn more money, a lower-earning year is erased from the average. This is another good reason to work longer and wait to collect benefits.

Children and surviving parents get benefits from a deceased spouses Social Security

If your spouse dies at the age of 62 or older, and was thus eligible to collect Social Security, any children under 18 (or under 20 if still in high school), are eligible for child benefits. The surviving parent of any children under age 16 can also receive survivor benefits. Children receive 75% of the deceased parent’s Social Security benefit. The surviving parent of children under 16 also receives 75% of the deceased spouse’s benefit. (There is a cap for a surviving family of between 150-180% of the deceased’s benefit amount.)

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<b>If you started collecting early, and now think that was a mistake, you can fix it</b>

The government allows you to pay back the benefits you received, say by withdrawing funds from your IRA or 4019(k) savings, and then re-file when you are older, allowing you to receive much higher benefits later.

<b>You don’t need to retire to collect Social Security, even at age 62, but you will pay a penalty</b>

Those who retire at 62, or before reaching full retirement age of 66 (67 for those born after 1960), pay a penalty of $1 for each $2 earned over $15,120 in 2013. For those who are reaching full retirement age of 66 this year and who start collecting Social Security will pay a $1 penalty for every $3 earned over $40,080 (these limits are raised each year for inflation).

But don’t be too troubled by the penalty. The Social Security Administration, after you reach full retirement age, will adjust upward your benefit amount to reflect the extra money you earned by continuing to work while collecting early benefits, and the money that was withheld as a penalty.

<b>Social Security income and the law</b>

Social Security income is protected by law from most creditors – but not from debts owed to the IRS, federal student loans or other federal government claimants (or from alimony or child-support payments).

This means you may want to settle federal debts using other assets before you are depending upon your Social Security benefits in retirement, but it also suggests that if you have transferred other assets, for example into a Trust for your children, you don’t have to worry about private creditors.

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<b>Social Security income is taxed at less than other income</b>

If your taxable income is less than $25,000 or $32,000 for a couple filing jointly, you owe no income tax on your Social Security benefits. Above that amount, the taxable amount of your Social Security benefits increases with income to a maximum of 85%.

However, since withdrawals from a Roth IRA don’t count as taxable income, it can be advantageous to start withdrawals from non-Roth retirement funds, holding Roth withdrawals until you start collecting benefits.

<b>Don’t rely on estimates</b>

In making plans for your retirement, don’t rely on the estimates from the Social Security Administration about your likely future retirement benefits. The administration does not factor in either inflation or any general average increase in wages. Since both are likely based upon historical trends, your future benefits are likely to be higher for any age than the estimates provided by the SSA.

<b>Marriage and Social Security</b>

People who divorce after 10 years of marriage and who then remarry normally cannot later receive spousal retirement benefits based upon an ex’s benefits. But there is a big exception: people who remarry after age 60. If you are a divorcee and the love of your life is not a big earner while your ex was wealthy, you may want to hold off on the nuptials until you pass age 60. That way, you can get spousal benefits in retirement of 50% of your ex’s benefit amount, and if he or she expires before you, you’ll get the full spousal benefit too.

Read more: Smart Ways to Talk About Retirement & Social Security.

Read more: What Advisors Get Wrong in Retirement Planning.