If Social Security is going to be your only or a major source of retirement income, it’s particularly important to maximize your monthly payments. You can also make your benefit go further by aiming to keep costs low. Here’s how to make sure your Social Security payments will cover your retirement expenses.
Pay off your mortgage before retirement. Housing is likely to be one of your largest expenses in retirement. If you can eliminate that big bill, you can use your Social Security income for other things. For example, homeowners age 65 and older in Colorado Springs, Colorado, pay a median of $1,221 per month for housing when they have a mortgage, but seniors who have paid off their house have median housing costs of $393 per month. A married couple jointly receiving $2,682 in monthly Social Security payments can comfortably cover the $393 monthly expenses of a paid-off house, while the house with a mortgage requires nearly half of their Social Security income.
Avoid claiming Social Security before your full retirement age. Your age when you sign up for Social Security plays a big role in the amount you will receive. If you start payments before your full retirement age, which is 66 for most baby boomers, your payments will be reduced. Baby boomers who claim Social Security at age 62 get 25 percent smaller monthly payments. So a worker eligible for $1,000 per month at age 66 would get $750 monthly if he elected to begin payments at age 62. “If you think you are going to die young and you need the money, there are people who choose to draw money early,” says Timothy Hayes, a certified financial planner and president of Landmark Financial Advisory Services in Pittsford, New York. “I usually encourage people to at least wait until their full retirement age because if they draw before that they are going to draw a permanently reduced benefit for the rest of their life. ”
Consider waiting until age 70 to sign up. You can boost your monthly Social Security payments if you delay signing up after your full retirement age. Baby boomers can increase their monthly payments by 32 percent if they don’t sign up for Social Security until age 70. This boosts a $1,000 Social Security payment at age 66 to $1,320 at age 70. The dollar value of your annual inflation adjustments will also be higher if you claim a larger payment amount. “You definitely should try to defer taking your benefit as long as possible,” says Alicia Munnell, director of the Center for Retirement Research at Boston College. “You are getting a source of inflation-protected income that lasts for life.” Social Security payments increase for each month you delay claiming them up until age 70.
Aim to maximize survivor’s payments. When one member of a married couple dies, the household will no longer have two Social Security checks coming in. The surviving spouse receives an amount equal to the larger of the two Social Security benefits. So a higher earning spouse who has a medical condition or doesn’t expect to live a long life might want to factor in the survivor’s payment he or she will leave behind to the surviving spouse. Delaying claiming Social Security can result in a bigger payment for widows and widowers. “If you are in a situation where you can’t afford for both of you to delay to age 70, you want to have the person with the higher benefit delay to age 70,” says John Palmer, a Syracuse University professor and former public trustee for the Medicare and Social Security programs. “Then the survivor’s benefit will be higher if the other spouse dies.”
Watch out for Social Security taxes. If Social Security is your only source of retirement income, you aren’t likely to have to pay taxes on it. However, if you have another source of retirement income, part of your Social Security benefit might become taxable. If the sum of your adjusted gross income, nontaxable interest and half of your Social Security benefit exceeds $25,000 for individuals and $32,000 for couples, half of your benefit could be taxable. If those sources of retirement income exceed $34,000 for individuals and $44,000 for couples, as much as 85 percent of your benefit could be taxable.
Prepare for temporary withholding if you work. Working part time is an increasingly common way to help pay for retirement. Working while claiming Social Security doesn’t pose any complications for those age 66 or older in 2016. However, if you earn an income while collecting Social Security before age 66, part or all of your Social Security payments could be temporarily withheld if you earn more than $15,720 in 2016. (If you will turn 66 in 2016, there’s a higher earnings limit of $41,880 and a smaller amount is withheld.) However, once you reach age 66 your benefit is recalculated to give you credit for the withheld benefit and continued earnings, so you are likely to enjoy higher Social Security payments going forward. “If you don’t already have 35 years of covered earnings at the max level, then your benefit is going to be higher if you work longer,” Palmer says.
Consider relocating to a place where the cost of living is lower. Moving to a lower cost area of the country could help your existing Social Security check to pay more of your bills. “If people live in a very expensive place when they retire, they can cash out their house and exchange to a below national average price house and have a very comfortable retirement,” says Charles Zhang, a certified financial planner for Zhang Financial in Grand Rapids, Michigan. But relocating to another state isn’t always necessary. Sometimes purchasing a more modest home within your own community is enough to reduce your ongoing housing costs.
Emily Brandon is the author of “Pensionless: The 10-Step Solution for a Stress-Free Retirement.”
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