Now that Congress has eliminated some of the more lucrative Social Security claiming strategies, retirees are looking for ways to maximize their retirement benefits.
Scott Willingham, a financial adviser with LPL Financial, wrote to me recently with a question about one of his clients who will turn 66 this summer.
“I am aware that [my client's] yearly Social Security payout will increase by 8% for every year he postpones claiming benefits beyond his full retirement age,” Mr. Willingham said in an email. “My question is will the higher payout after age 66 increase even more because he had higher income in recent years that will replace earlier low-income years?”
“Yes, your client will receive delayed retirement credits of 8% per year for every year he postpones collecting benefits beyond his full retirement age,” I confirmed. “And if his current earnings are higher than one of the 35 years of indexed earnings used to calculate his benefit, his benefit could increase, too. But keep in mind that only earnings up to the taxable wage base each year ($127,200 in 2017) count in the benefit calculation.”
The Social Security Administration bases benefits on your lifetime earnings. The agency adjusts, or indexes, your actual earnings to account for changes in average wages since the year the earnings were received. Then Social Security calculates your average indexed monthly earnings during the 35 years in which you earned the most. SSA applies a formula to these earnings to determine your basic benefit, or primary insurance amount. This is how much you would receive at your full retirement age.
You are eligible for cost-of-living benefit increases starting with the year you reach age 62 up to the year you start receiving benefits. This is true even if you don't get benefits until your full retirement age or even age 70.
In some cases, you can work while you receive Social Security retirement (or survivor) benefits. When you do, it could mean a higher benefit for you in the future. Higher benefits can be important to you later in life and increase the future benefit amounts that your family and your survivors could receive.
Each year SSA reviews the records for all working Social Security recipients. If your earnings for the prior year are higher than one of the years the agency used to compute your retirement benefit, SSA will recalculate your benefit amount. The increased benefit will be retroactive to January in the year after you earned the money.
If you are younger than full retirement age and make more than the yearly earnings limit, your earnings may reduce your benefit amount. Full retirement age is 66 for people born between 1943 and 1954. Beginning with 1955, two months are added for every birth year until the full retirement age reaches 67 for people born in 1960 or later.
If you are under full retirement age for the entire year, SSA deducts $1 from your benefit payments for every $2 you earn above the annual limit. For 2017, that limit is $16,920.
In the year you reach full retirement age, SSA deducts $1 in benefits for every $3 you earn above a different limit. In 2017, the limit on your earnings is $44,880 but SSA only counts earnings before the month you reach your full retirement age.
If your earnings will be over the limit for the year but you will be retired for part of the year, SSA has a special rule that applies to earnings for one year. The special rule lets SSA pay a full Social Security check for any month you are consider retired, regardless of your yearly earnings.
If you will be under full retirement age for all of 2017, you are considered retired in any month that your earnings are $1,410 ($16,920/12) or less and you did not perform substantial services in self-employment. If you reach full retirement age in 2017, you are considered retired in any month that your earnings are $3,740 ($44,880/12) or less and you did not perform substantial services in self-employment. “Substantial services in self-employment” means that you devote more than 45 hours a month to the business or between 15 and 45 hours to a business in a highly skilled occupation.
(Questions about new Social Security rules? Find the answers in my new ebook.)
Mary Beth Franklin is a certified financial planner.