The Ultimate Guide to Optimising Your Social Security Payment

Are you nearing retirement? If so, it’s important to start considering the amount of money you will have throughout your retirement and how it’s being funded. The most common method (61 million people collect payments) is to fund our retirements by utilising our social security payouts.

You might have been contributing for years and we’re expecting a large payout, but remember to optimise your social security payments before filing. This guide will provide all the details how you can maximise your payout:

Review pay accuracy and optimisation

Since 2014, the social security administration decided to reduce the social security statements from annually to every 5 years whilst offering an online solution for unlimited access. The encouragement towards online accounts means less people who are proactively conscious of their payouts were able to track and be aware of the payment they would receive. Luckily, creating an account is simple and informative to the financial situation we might experience once we retire.

The first step is to check for any anomalies within our lifetime of paychecks. This can be achieved by following “view earning record.” Even though these are generally correct, it’s worthwhile ensuring the social security administration have been correctly documenting your contributions.

Secondly, check your years of earnings. This is calculated by including the highest 35 years of earnings that is used to form your Primary Insurance Amount (PIA).

Therefore, if you’ve been earning for 25 years and plan to retire in 10 years, you’re perfectly on track to experience the maximum years of contribution, whereas if you’ve already been earning for 35 years and expect to retire in 5 years. The highest 35 years will only be included, with the lowest 5 years being replaced. However, it’s essential to remember that earnings are indexed, so the money made during your younger years isn’t actually that low when you factor in the index.

Optimise your spousal benefit

If you’ve got a spouse, then they can claim up to 50% under your earnings record if their payouts would be less. This option would be strongly recommended if you could receive a higher payout than your spouse using their own records.

Spouse monthly payout = $850

Your monthly payout = $2,000

Spouse monthly payout under your earning records = $1,000

However, this benefit comes with restrictions which can impact the amount of money received. The main restriction is the age to file the claim whereby if you were born after 1960 and your spouse took the payments before you were 67, they would receive 35% less than the original 50%. Therefore instead of the $1,000, they’d receive only $650 a month and lose out on $350 a month.

The difficult decision is dependable on the financial situation when before 67 and whether the money would be more useful than a greater overall sum at that period in your life.

If the money was filed when you were 62

62 – 67 = $31,200

67 – 90 = $179,400

Total = $210,600

If you waiting until you were 67

62 – 67 = $0

67 – 90 = $276,000

Total $276,000

Potential loss of $65,400

Minimise tax obligations

Not regarded as a way to boost your social security payments but rather a way of optimising them so that you minimise the tax associated to the social security payments and therefore safeguarding your money. The details about how different taxes are attached to social security are complex, so it is worth investigating.

  • The key aspect regarding taxes and social security payments is provisional income.
  • Provisional income = adjusted gross income + (0.5 x social security payments) + tax-free interest income

It’s sometimes beneficial to delay claiming specific payments to minimise the tax implications, for example:

Overclaiming

  • Social security payments = £50,000
  • Traditional IRA = $50,000

Federal tax contribution would be $8,088 and then to pay taxes on 65% of the social security payments

Managed claiming

  • Social security payments = $50,000
  • Traditional IRA = $7,000

Federal tax contribution would be $0 and no taxes on any social security payments as the provisional income threshold is $32,000.

Tax-free income

Whether the final figure of your social security payment is sufficient for your lifestyle or ambitions, it’s worthwhile investigating where you could obtain legal tax-free income.

This is perfectly summed up by individuals who previously purchased PPI, which was a scam by the UK banks and now those individuals are entitled to reclaim their tax-free investment.

Optimising your social security payments

As shown, the initial figure presented to you as your social security payments can be optimised and enhanced to be flexible in your favour. It’s essential to keep on top of ways to maximise your payments for a more comfortable retirement.