Maximizing Social Security Benefits: Get the Most Out of Medicare and Pay Less in Taxes: Part 1

Social Security and how you can maximize your retirement income is not just a hot topic for those planning for retirement; it’s a critical area in which knowledge is power. In 2020 alone, about 65 million Americans^[1]https://www.ssa.gov/news/press/factsheets/basicfact-alt.pdf will receive over one trillion dollars in Social Security benefits, but they won’t all get the same amount, they won’t all have the same tax rate, and most might not even get what they put in.

When Should I Take Social Security?

You’re able to take Social Security benefits as early as age 62 and as late as age 70. However, if you delay taking benefits from your full retirement age (or FRA) up to age 70, your benefit amount may increase.

What age you fully retire depends on where you are in life. It sounds a little New-Age, but planning your retirement is all about being honest with where you are. Consider these questions: Are you still working? What are your needs? Do you need this income now, at age 62? Or can you let it build a little longer? 

The SSA, or Social Security Administration, calculates the 35 highest-earning years^[2]https://www.ssa.gov/pubs/EN-05-10070.pdf for you to determine what your amount would be at age 62, and then full Social Security at age 70.

Remember, it’s the 35 highest earning years for you. If you continue working after age 62, those years count as well and can impact your overall earnings.

Where Does Social Security Fit into Your Retirement Plan?

At Beacon Capital Management, we believe an income plan is the foundation of your financial house. Social Security income is an important part of a successful retirement.

There are many rules that guide and determine Social Security, the amount you receive, and all that’s associated with it. Over 2,700 rules to be exact^[3]https://www.marketwatch.com/story/making-sense-of-some-of-social-securitys-2700-rules-2015-10-23, and that’s why it’s important to learn how these rules impact your situation. We can’t sugarcoat this: these rules can complicate when and how you take your Social Security and can cause a domino effect on many other things like your Medicare premiums, taxes, and so on.

One of the main domino effects to avoid is triggering other taxes associated with your income and retirement. Take medicare premiums, for example. Everyone in retirement is not paying the same amount of taxes concerning their Social Security, and not everyone has the same amount of tax.

What Determines How Much of My Social Security Is Taxed?

If you can imagine, there are people in retirement who pay no taxes on their Social Security.

If they’re getting $2,000 a month, they’re keeping all of it. That sounds good, right? On the flip side, some people are paying taxes on 50% of their benefits. If they’re getting $40,000 a year, for example, that means $20,000 of that is taxed at their income rate.

What’s more, some people are paying as much as 85% of their Social Security as taxes.

If, as a family, you’re receiving $25,000, $35,000, or even over $50,000 in benefits annually, whether it’s taxed at zero, 50%, or 85%, — the age you retire will determine how much of your Social Security income you get to spend.

Knowing all the benefits and how taxation takes place is a critical component of the retirement planning process. We don’t want to scare you with worst-case tax scenarios, but the more you know about your options, the better. In fact, knowing the ins and outs of the Social Security Administration’s rules can provide you with tools in retirement (like fixed-income securities^[4]https://corporatefinanceinstitute.com/resources/knowledge/trading-investing/fixed-income-securities/) that don’t affect taxes on your Social Security at all.

When Are Social Security Benefits Included in Gross Income?

There are situations when seniors must include their Social Security benefits in gross income. This usually happens if you have other substantial income in addition to your benefits^[5]https://www.ssa.gov/benefits/retirement/planner/taxes.html (such as municipal bonds, a Roth IRA, a regular IRA, another pension, and other taxable income that must be reported on your tax return). Do you receive dividends from a brokerage account or interest off a CD or an annuity? Some of those things negatively affect the taxation of your Social Security, while other things are inconsequential.

If you’re married filing jointly and have less than $32,000, you won’t be taxed. But, if you have a combined income of more than $32,000, some of your Social Security will be taxed^[6]https://www.ssa.gov/benefits/retirement/planner/taxes.html#:~:text=between%20%2432%2C000%20and%20%2444%2C000%2C%20you,your%20benefits%20may%20be%20taxable..

If you are filing as an individual, the cap is $25,000.

So no, the powers that be don’t allow you to have a lot of income before they tax your Social Security. The vast majority of people end up being taxed on either 50% or 85% of their Social Security. Over a 20-year period of retirement, that’s a lot of money going to Uncle Sam instead of your enjoyment in retirement.

How Can I Make Sure I’m Maximizing My Social Security Benefits?

The best way to maximize your social security benefits is to know the rules, have a plan, and talk to a financial planning professional.

You only get one shot to make certain decisions about your retirement, so do the research, find someone you trust who will answer all your questions, and get a realistic plan in place. You can’t really start too early. 

Earlier, we mentioned a domino effect and how one decision can trigger outcomes in several other areas–that’s not always a bad thing. Everything in retirement builds, so if you’re making excellent decisions and maximizing your Social Security income–other excellent outcomes will follow.

In Part 2, we’ll talk about taxes, things that can impact Social Security, Medicare, and how good planning in these areas is integral to your financial well-being in retirement.

Connect With a Financial Advisor

At Beacon Capital Management, we help our clients develop financial strategies that cover the most important areas of your life. Our highly-credentialed advisors will guide you through our process to ensure your unique goals and priorities are covered. If maximizing your Social Security benefits is top of mind, we can help.

Schedule a complimentary conversation today and let’s get started building a strategy that puts you first.