How to boost your Social Security payments
How much you earn and your age when you sign up play a big role in how much you will receive from Social Security. Workers who familiarize themselves with the Social Security rules will be better able to maximize their payments. Pay close attention to these aspects of the program when making Social Security decisions.
6.2% payroll tax
Most workers pay 6.2% of their earnings into the Social Security system, and employers match this amount. Self-employed workers contribute 12.4% of their income to Social Security. You can see how much you have paid in and check that your earnings have been recorded correctly with a my Social Security account. If you spot any errors on your Social Security statement, take care to correct your Social Security earnings record by gathering appropriate documentation and contacting the Social Security Administration. The current 6.2% Social Security tax rate has been in effect since 1990.
$137,700 tax cap
The maximum amount of earnings subject to Social Security tax is $137,700 in 2020. Earnings above the tax cap aren’t taxed by Social Security or used to calculate retirement benefits. Workers who earn more than $137,700 in 2020 will notice a bump in their paycheck when Social Security taxes stop being withheld. The Social Security taxable maximum is adjusted for inflation each year. The tax cap was $132,900 in 2019, $51,300 in 1990 and just $3,000 in 1950 and earlier.
35 years of earnings
Your Social Security payments are calculated using the 35 years in which you earned the most. If you don’t work for at least 35 years, zeros are averaged in and will reduce your retirement payments. Working for more than 35 years can improve your payments because your lowest-earning years could be dropped from the calculation. If you continue to work in retirement, even after starting to receive Social Security payments, your benefit will be recalculated to give you credit for another year of earnings and can replace a year of low or no earnings.
$1,503 average payment
Retired workers will receive an average Social Security payment of $1,503 per month in 2020. Retired couples bring in an average of $2,531 monthly. Payments are adjusted each year to keep up with inflation as measured by the Consumer Price Index for Urban Wage Earners and Clerical Workers. Cost-of-living adjustments have ranged from zero in 2010, 2011 and 2016 to 14.3% in 1980. Social Security beneficiaries received a 1.6% cost-of-living adjustment in 2020. The maximum possible Social Security payment for a worker who retires at full retirement age in 2020 is $3,011.
Initial eligibility at age 62
Workers first become eligible to start Social Security retirement benefits at age 62. However, monthly payments are reduced by 25% or 30% if you claim them at this age, depending on your birth year. For example, a baby boomer who qualifies for $1,000 per month from Social Security at age 66 would get a reduced payment of $750 per month if he elects to sign up for Social Security at age 62. Those who have a full retirement age of 67 get a bigger benefit reduction for starting Social Security payments early.
The baby boomer full retirement age is 66.
Your full retirement age is the age at which you can collect the Social Security benefit you have earned without any reductions. The original Social Security retirement age was 65. However, a 1983 law increased the full retirement age depending on your year of birth. People born between 1943 and 1954 are eligible to claim unreduced Social Security benefits at age 66. The full retirement age then gradually increases from 66 and two months for people born in 1955 to 66 and 10 months for those with a birth year of 1959.
The full retirement age will increase to 67.
People born in 1960 or later become eligible for their full Social Security retirement benefit at age 67. Millennials and members of Generation X need to wait a year longer than the baby boomers and two years longer than their grandparents to claim their full retirement benefit. Those born after 1959 also experience bigger reductions in Social Security benefits if they start payments before their full retirement age and get less of a benefit if they delay claiming Social Security past their full retirement age.
Maximize your monthly payments at age 70.
Social Security payments increase for each month you delay starting your payments up until age 70. After age 70, there is typically no additional benefit to waiting to sign up. Retirees can boost their monthly payments by 24% to 32%, depending on their birth year, by claiming Social Security at age 70. If you already started your Social Security payments, you have the option to temporarily suspend your Social Security payments between your full retirement age and age 70 in order to qualify for larger payments later on in retirement. Suspending Social Security payments allows you to earn delayed retirement credits and then restart Social Security payments later at a higher rate.
$18,240 earnings limit
If you work and collect Social Security at the same time before your full retirement age, part of your Social Security payments could be temporarily withheld if you earn more than $18,240 in 2020. Beneficiaries who exceed the earnings limit will have $1 in benefits withheld for every $2 in income above the limit. Those who reach full retirement age in 2020 have a higher earnings limit of $48,600, and the penalty declines to $1 withheld for every $3 in excess of the earnings limit. However, once you turn your full retirement age, there’s no benefit reduction for working and claiming benefits at the same time, and your payments will be increased to give you credit for payments that were withheld in the past.
$25,000 in retirement income
You might need to pay income tax on your Social Security payments. If the sum of your adjusted gross income, nontaxable interest and half of your Social Security benefits exceeds $25,000 ($32,000 for couples), half of your Social Security benefit becomes subject to income tax. And if these income sources top $34,000 ($44,000 for couples), income tax could be due on 85% of your Social Security payments. You can have federal taxes withheld from your Social Security benefit or make quarterly estimated tax payments to the IRS. Most states don’t tax Social Security income, but there are a few states where your Social Security income might be taxable.
Social Security Rules to Remember:
- Most workers contribute a 6.2% payroll tax.
- Earnings that exceed $137,700 in 2020 aren’t taxed by Social Security.
- Thirty-five years of earnings are factored into your Social Security benefit.
- The average Social Security payment is $1,503 per month in 2020.
- The initial Social Security eligibility age is 62.
- The baby boomer full retirement age is 66.
- The full retirement age will gradually increase to 67.
- Maximize your monthly payments by claiming at age 70.
- There’s a $18,240 earnings limit if you claim Social Security before your full retirement age.
- Retirees who earn more than $25,000 will pay tax on part of their Social Security benefit.
Updated on June 8, 2020: This story was published at an earlier date and has been updated with new information.