(This article was originally published in edited form on Fortune.com. Mike Stevens is one of our colleagues and helped present at my Money Making and Asset Protection Boot Camps for a few years.)
For many, Social Security has represented nothing more than an inescapable payroll deduction with the enigmatic initials of “FICA” and “OASDI.” While some have the perception that Social Security is of secondary importance, both advisors and clients are waking up to the fact that Social Security should be used as a fundamental part of their retirement planning. Like most government programs, Social Security rules are often complicated—but knowing how to implement them gives you an advantage to some truly fantastic benefits.
Here are 3 key tips to know prior to taking your Social Security benefits:
1. Wait to start receiving Social Security benefits.
The success of the benefits received largely hinge upon correctly answering the question of “when to take Social Security.” Social Security eligibility begins at age 62, but in order to receive your full retirement benefits, you must not take Social Security prior to your full retirement age (determined by birth year) which for most people is 66.
For each year you wait past your full retirement age, you will be paid an additional 8% increase per year in the form of Delayed Retirement Credits. The maximum age to delay is 70 years old and in doing so, you will increase income benefits payouts by 32%. However, financial, longevity or health concerns can play an important part in the decision to take your benefits early, as each circumstance is unique.
2. Keep Social Security taxes in mind.
My father taught me a simple, yet profound principle that has stuck with me throughout my life, “It’s not how much you earn, but how much you keep that counts.” If you are receiving Social Security benefits, you must be mindful of how continuing to work can affect your benefit payments. Earning income above Social Security thresholds can cause a reduction in benefits and also means your benefits will be taxed.
For example, if you are younger than full retirement age, there is a limit to how much you can earn and still receive full benefits. As of 2015, if you are collecting Social Security benefits and earning more than $15,720 from wages, Social Security will deduct $1 from your benefits for each $2 you earn over the said threshold.
Furthermore, exceeding the threshold of $41,880 in earnings results in Social Security deducting $1 from your benefits for each $3 you earn until the month you reach full retirement age. Once you reach full retirement age, your benefits will no longer be reduced. If your benefits are withheld, at least some of those benefits will be returned to you in the form of higher monthly benefits once you reach full retirement age.
Lastly, you may need to hand part of your Social Security benefits back to Uncle Sam in the form of taxes. If your combined income is between $25,000 and $34,000 ($32,000 and $44,000 if filing jointly), you may have to pay taxes on 50% of your benefits. If your income is more than $34,000 ($44,000 if filing jointly), then you may have to pay taxes on up to 85% of your benefits. If paying taxes on your Social Security benefits appears inescapable, you can strategize somewhat to help minimize the sting of taxation.
3. Don’t double down.
“The chief cause of failure and unhappiness is trading what you want most for what you want right now,” according to Zig Zigler. The phrase “You don’t know what you don’t know” applies here because not knowing just may adversely affect your benefits. Stated in the book Get What’s Yours by Kotlikoff, Moeller, and Solman, “…since you cannot collect two benefits at once, collect one early while letting the other benefit grow…” This should be of great significance in your Social Security planning. You can be eligible for multiple benefits at the same time, but if you try to collect at the same time, Social Security will only give you the one benefit, causing the other benefit to disappear. Knowing a few key strategies to help you apply for one while the other grows is smart retirement planning.
By applying a few little-known Social Security tips, you could ensure an enhancement in your retirement income of as much as $64,000 each year. Working with an advisor that understands the importance of Social Security planning and strategies can be one of the best sources of guarantees in your retirement portfolio.
One thing is certain; there are not many places these days that you can get a guaranteed 8% return on your money… let alone up to a guaranteed 32% increase without taking on any additional market risk. Each individual should consult an advisor who is a fiduciary and understands Social Security planning. After all, you’ve paid into Social Security for years and deserve all that you are entitled to.