BEFORE YOU RETIRE & WHEN YOU RETIRE
by Ellen Hoffman
HOW TO MAXIMIZE YOUR RETIREMENT BENEFIT
Now that you know the basics of how Social Security works, lets see what you
can do to make sure you receive the highest possible benefit.
In general, the more money you earn the higher your Social
Security benefit will be. However, there are limits of how high your benefit can rise.
One is the limit on the "maximum earnings
taxable." This refers to the amount of your earning on which your payroll or FICA tax
is paid. In 1999, you must pay the tax on up to $72,600 of income. The amount increase
each year based on the national average wage. Once you earn the maximum in a particular
year, you do not pay any more FICA tax for that year. But you also do not increase your
future benefit. Even if you earn more than the maximum taxable amount for many years, you
could not increase your benefit at all.
The second legal break on your benefit is called the
"earnings limit." This comes into play if you start to receive your Social
Security benefit but continue to work. Once you have retired, and you earn wages over a
certain dollar level, the Social Security system will dock your benefit until you reach
Heres how the earning limit works: In 1999, for
example, if you are under sixty-five, you will lose one of every two dollars of your
benefit for every dollar you earn over $9,600. People between the ages of sixty-five and
sixty-nine will have their benefit cut by $1 for every $3 over earnings of $15,500. The
amount of the earning limit for people under sixty-five in future year will be calculated
on the basis of a formula that contains factors that change annually.
For the next few years, however, the limits for people ages
sixty-five to seventy have already been set at:
How can you guarantee that youll receive the highest paying benefit, either
now or in the future? Here are several strategies. One, or a combination of these, may
work for you.
BEFORE YOU RETIRE
If you earn less than the maximum taxable earning, consider moonlighting or
developing a small business on the side.
The formula for calculating benefits averages your earnings over thirty- five
years, assuming that you have worked at least that many years. If, as usually happens, you
have the highest earnings toward the end of you career, youll raise your benefit by
working at a higher rate for as many years as possible.
If you do not make the maximum taxable earnings, consider
booting your income and your lifetime average by activities such as consulting; converting
your woodworking hobby into a legitimate, profit making business; or setting up a weekend
catering operation. This strategy will help you most if youre in a career path that
wont take you regular earning to the maximum contribution level.
Dont assume that the tax hit on you added income will
not be worth the extra work. With a sideline business profit of $10,00 a year added to
your pre-tax income, you could still hike your annual average earnings and you
lifetime Social Security benefit base by an average of several thousand dollars. If
youre not sure how this would work for you, ask you accountant or other financial
advisor to help you crunch the numbers.
Plan work force absences carefully
When youre deciding whether to take time off to raise a child or care for an
ailing relative, the impact of this decision on your retirement benefits may be the last
thing on you mind. but you should consider it because every year you have zero earnings,
work part-time, or earn less than you full salary, you are probably dragging your future
retirement benefit down.
Women need to be especially vigilant about work force
absences. Thats because womens Social Security benefits average about 25
percent less than mens not because of gender difference written into law, but
because their work history tends to differ from mens. If you are thirty-five years
old, for example, and decide to stay home for fifteen years while raising a family,
youll have fifteen zeroes in the computation of your annual earnings record. As a
result, you may either have to settle for a lower benefit or work until you are older to
come up with thirty-five years that will give you a better retirement payment.
WHEN YOU RETIRE
If you earn less than your spouse, or are not working for a salary, consider
starting to take your benefit at sixty-two.
If youd like to boost the family income while you are still in your
sixties, this strategy may help you. Lets look at an example; Nancy is sixty-two.
The only time she worked outside the home was for ten years before she got married and had
her children. If she retires now, shes entitled to a monthly payment of $400 (after
the 20 percent reduction for retirement at the age of sixty-two). When Nancys
husband retires at the age of sixty-five, his monthly Social Security benefit will be
$1,350. Nancy could retire today and receive her $400 per month, based on her own
earnings. Them when her husband retires, she could receive a benefit based on his work
record. This will come to $540, or half of his benefit ($675), reduced by 20 percent
because she took early retirement.
Collect benefits based on the work record of your divorced spouse.
If your own earnings were sporadic or low, this entitlement half of what you
ex-spouse would collect at age sixty-five could pay you a larger benefit than your
own work history. You can start collecting this benefit as early as age sixty-two, even
before you ex-spouse retires. And, whats more, your claim to the benefit will not
affect the size of your exs in fact, he or she doesnt even have to know
youre collecting it! To qualify, you need to meet the following criteria:
You must have been married for at least ten years;
You cannot be married to someone else;
The benefit you receive based on your ex-spouses work record must be
larger than the benefit youd receive based on your own work
If your ex- has not signed up for Social Security yet, you must have been
divorced for at least two years.
If you are contemplating a divorce, dont forget the
ten-year rule. If youve been married, say, nine years, and you have been earning
less than your spouse, you may want to preserve your right to the divorce benefit by
postponing the official break until you pass the ten-year mark. And, by the way,
dont forget to keep a record of your spouses Social Security number so that
you can expedite your application for your benefits.
Collect a benefit for your school-aged child.
You may think you cant afford to retire with a child still in school, but Uncle
Sam can help out by providing a benefit for a child or children under the age eighteen, or
under nineteen for children who are still attending elementary or secondary school full
You can take advantage of this rule if you had a child late
in life or married someone who is younger or has younger children. Heres an example
of how it works. Lets say that when you retire, youll qualify for a monthly
benefit of $1,200. If you do retire, you may collect an additional 50 percent, or $600,
raising the total to $1,800 per month, for your sixteen year-old. If you have two or more
children still in school, you could get up to 88 percent more than your basic benefit.
Take advantage of the "first year" exception to the earnings
As described above, if you earn more than the earnings limit $9,600 if you are
under age sixty-five; and $15,500 if you are between sixty-five and sixty-nine in
1999 youll have your retirement benefit reduced according to a special
formula. However you can reduce the penalty in you first calendar year of retirement,
because it applies only to the months after you begin collecting benefits. Heres how
it works; Lets say you leave work in July at age sixty-five, after earning $40,000
from January through June, or $24,500 more than the limit if $15,500. Normally, you
benefit would be reduced by one dollar for every three dollars you earned over the
threshold, or $8,167 enough to reduce your monthly benefit by $681 per month for the
Because of this special rule, however, in your first
calendar year of retirement you may collect your full Social Security check in any month
after you begin benefits, as long as your earnings after you retire dont exceed
$1,292 a month (one twelfth of the current earnings limit).
If you collect royalties, payment such as vacation or back pay, or sales
commission after you retire, this income may not be subject to the earnings limit. Be sure
to tell Social Security about any "special payments" you may receive.
"Special payments" are income you receive for work completed before
retirement. They include royalties from a book you wrote or a patent you secured before
age sixty-five; benefits such as vacation, sick pay, and severance pay; and back pay and
sales commissions. Common examples of special payments are commission that insurance agent
receive for policies sold before they retired and income from the sale of agricultural
crops that have been stored and are sold after the farmer retires.
As described earlier, your Social Security benefits may be
reduced when you exceed certain income limits if you are under seventy years old. But
unless you know how the "special payment" rule works, your check may be reduced
more than necessary.
Here are two examples of how this provision works:
Barbara retired at age sixty-five from her job as an
accountant. She started collecting Social Security but also continued to work for a few
private clients. During her first year of retirement, she made $17,000 from that practice.
Since this exceeds the $14,500 earnings limit, Social Security would have reduced her
benefit according to the formula. Those earnings, however, consisted of $10,000 in fees
and $7,000 for vacation and sick leave had she not used it while on the job. Because the
"special payment" of $7,000 could be subtracted from her earnings of $17,000,
Barbaras earnings were in effect reduced to $10,000, so her benefit was not cut that
Albert wrote a classic college textbook in 1980 and
each year he receives royalty payments from the sales. In 1996, when he retired at age
sixty-five, the royalty check was $14,000. Since the book was written before he retired,
although he must report the income to Social Security, none of Alberts royalty
payment is counted toward the earnings limit, and he will receive his full Social Security
Dont Forget to Get Your PEBES
As long as you are working, keep track of your future Social Security benefits by
requesting a copy of your Personal Earnings and Benefit Estimate Statement (PEBES)
annually from the Social Security Administration. You can order your PEBES by calling the
toll-free number, 1-800-772-1213, or through the agencys website: www.ssa.gov/.
This statement lists the number of years you have
been credited for working, and based on your estimates of future income
projects the size of your benefit upon retirement at age sixty-two or your full retirement
Why should you make a point of getting your PEBES?
Seeing the actual figures may stimulate you to evaluate and possibly change your current
job. It also allows you to catch errors in your earnings record as they crop up. If you
have been working for other employers rather than for yourself, it is especially important
to make sure that each one has reported all of the time that you worked. The longer you
wait to correct an error, the harder it may be to find your previous employer or accurate
documentation of the time you worked.
If you were born before 1944, you should have
automatically received a PEBES in the mail in the last two or three years. By October 1,
1999, SSA plans to mail statements to everyone twenty-five and older annually.
Stay Out of "Suspense"
Have you changed your name due to marriage or divorce? Have you used a nickname such
as Maggie, instead of your full name, Margaret? Signed some of your employment records as
Margaret Jones, M.D.? Spent a few summers working in a bar at the beach, or picking
artichokes in California? People who change their names, use a nickname or a title, or
work in service or agricultural businesses are most vulnerable to losing Social Security
credit for their earnings.
How could this happen? When Social Security receives
a W-2 or self-employment tax form with a name and Social Security number that dont
match, the agency refers it to the "suspense file." After the reports are
subjected to several manual and computerized processes, the yearly average of reports in
the file is about 1.5 to 2 percent. If some of your earnings are in that file, you could
receive a lower benefit than you deserve, or if you cant prove that
youve worked the minimum of ten years required you may not qualify for any
benefit at all.
To make sure that your earnings dont end up in
the suspense file, which contains $200 billion in earnings:
Make sure that you are using exactly the same
name on all of your employment records thats the one on your Social Security
If you change your name for any reason, report
it to Social Security by calling the toll-free number;
Read your Personal Earnings and Benefit
Statement carefully. If you see a zero or lower income than should be there for a
particular year, collect evidence of your employment W-2 forms, tax forms, and the
like and call Social Security to arrange to have the missing earnings credited to
Remember: you are probably the only person in the
world who can get your earnings out of suspense and the only one who cares enough to
bother to do it.
From BANKROLL YOUR FUTURE: How to Get the Most from the Government for Your
Retirement Years, by Ellen Hoffman. Copyright © 1999 by Ellen Hoffman. Excerpted by
arrangement with Newmarket Press. $24.95. Available in local bookstores or click here.