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How to Maximize Social Security Benefits


by Ellen Hoffman

Now that you know the basics of how Social Security works, let’s 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 age seventy.
     Here’s 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 you’ll 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.

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, you’ll 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 you’re in a career path that won’t take you regular earning to the maximum contribution level.
     Don’t 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 you’re 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 you’re 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. That’s because women’s Social Security benefits average about 25 percent less than men’s— not because of gender difference written into law, but because their work history tends to differ from men’s. If you are thirty-five years old, for example, and decide to stay home for fifteen years while raising a family, you’ll 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.

If you earn less than your spouse, or are not working for a salary, consider starting to take your benefit at sixty-two.

If you’d like to boost the family income while you are still in your sixties, this strategy may help you. Let’s 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, she’s entitled to a monthly payment of $400 (after the 20 percent reduction for retirement at the age of sixty-two). When Nancy’s 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, what’s more, your claim to the benefit will not affect the size of your ex’s— in fact, he or she doesn’t even have to know you’re 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-spouse’s work record must be larger than the     benefit you’d receive based on your own work history; and
• 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, don’t forget the ten-year rule. If you’ve 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, don’t forget to keep a record of your spouse’s 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 can’t 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 time.
     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. Here’s an example of how it works. Let’s say that when you retire, you’ll 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 penalty.
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— you’ll 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. Here’s how it works; Let’s 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 entire year.
     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 don’t 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, Barbara’s earnings were in effect reduced to $10,000, so her benefit was not cut that year.
     • 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 Albert’s royalty payment is counted toward the earnings limit, and he will receive his full Social Security benefit.

Don’t 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 agency’s website:
     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 age.
     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 don’t 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 can’t prove that you’ve worked the minimum of ten years required— you may not qualify for any benefit at all.
     To make sure that your earnings don’t 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— that’s the one on your Social Security card;
     • 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 your account.
     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.