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Four Ways to Maximize Your Social Security Benefits

Social-security-Benefits-300Ask any financial adviser, and they will tell you that retiring on Social Security alone is not an ideal situation. It can be done, however, with some careful planning. 

The fact is, the Great Recession of 2007–2009 had a profound impact on retirement savings, particularly affecting those that were approaching retirement age. With the stock market decline and falling home values, workers close to retirement did not have adequate time to recoup their lost savings, forcing many to rely on Social Security benefits earlier, or more than they initially planned.

According to the Social Security Administration (SSA), 65% of aged beneficiaries received at least half of their income from Social Security in 2012. Furthermore, a significant number of Baby Boomers, 44% to be exact, do not have a pension or an employee-sponsored retirement plan.    

Regardless if you are in a situation where you may be forced to depend on Social Security alone, or you are just looking for ways to maximize your benefits once you near the age of retirement, we have several ways to help you make the most of your hard-earned benefits.

1. Maximize Your Work Credits

It's common vernacular to refer to Social Security benefits as an "entitlement," but if you ask me, that's quite inaccurate. The fact is, in order to withdraw Social Security, you literally have to earn it. The amount of your monthly benefit upon retirement is based on the number of work credits you earned throughout your lifetime of employment. In 2015, you can receive one credit for every $1,220 you earn, up to four credits per year. The amount needed to earn one credit is adjusted each year by the SSA, based on earnings levels. You must earn at least 40 credits to be eligible for Social Security benefits, based upon the 35 non-consecutive years when you earned the most money.

In order to maximize your benefits, your best bet is to max out the number of credits per year while you can, for as long as you can. Should there come a time when you lose your job, can no longer work, or choose to work part-time (you can still earn credits while working part-time), at least you will have built up a "bank" of work credits.  

2. Take Advantage of Spousal Benefits

Marriage comes with an extra set of advantages when it comes to Social Security benefits. There are a lot of intricacies involved with a spouse's Social Security benefits, particularly when it comes to divorce or death of a spouse, but for now we'll focus solely on the spousal benefit. Your spouse will be eligible to receive Social Security benefits on your behalf, whether they worked or not, up to 50% of your benefit once they're reached full retirement age.

For example, if your monthly benefit is $2,000, and your spouse is only receiving $500 monthly (based on their number of credits), he/she could apply for a spousal benefit to receive $1,000 (50% of your benefit), instead of his/her $500 individual benefit. If your spouse does qualify for their own benefits at full retirement age, but would receive more as a spouse (based on the 50% rule), he/she would get a combination of benefits equaling the higher amount.

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3. Delay Withdrawing Your Benefits

Depending on your age, retirement may be the furthest thing from your mind, but if you are approaching that stage in your life where you're ready to hang up that suit and start your gardening or fishing career, you may consider delaying withdrawal in order to maximize your Social Security benefits. If you are at full retirement age and have enough savings to delay withdrawing your Social Security benefits, there are big advantages to waiting—your benefit will grow 8% annually, up to the time you turn 70. Even if you are only able to hold off withdrawal for a couple of years, it's an easy way to increase your benefit and an option you should consider.

4. Retire in a Tax-Friendly State

It's pretty common knowledge that the cost of living varies on a state-by-state basis. Certain regions of the country are more expensive because of their climate, attractions, local economy, tax rates, and more. When it comes to maximizing retirement benefits such as pensions and Social Security, some states have better tax advantages. Federal income tax is almost always inevitable, but several states in the U.S. also impose a state tax on Social Security benefits, and by simply choosing not to live in one of those states, you can maximize your benefits.

The 12 states that do not tax Social Security benefits are: Alabama, Alaska, Florida, Mississippi, Nevada, New Hampshire, Pennsylvania, South Dakota, Tennessee, Texas, Washington, and Wyoming. Of course, when it comes to levying tax benefits there is much to consider including estate, sales, capital gains, property, and a myriad of other taxes, but the point is, deciding on a tax-friendly state to retire in can be key to extending and maximizing your retirement income.

Preparing for retirement is critical—whether you're 25 or 55; the preparation simply looks different. Having a thorough understanding of how to invest now and withdraw your benefits later can help you get a handle on your future, or present, retirement planning.

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