Here at Optimize Your Retirement, we’re all about strategically claiming your Social Security pension. Social Security isn’t what it used to be, but you can still rely on it to supplement your income. In fact, you can count on Social Security to cover 30 – 40 % of your expenses in retirement. Your retirement assets don’t have to work as hard as if you didn’t receive Social Security and this is a huge help.

Does Social Security Max Out?

Yes, unfortunately. For 2016, the maximum Social Security pension amount is $2,639 monthly or $31,668 annually.

How is Social Security Calculated?

Social Security is calculated by taking the monthly average of a worker’s highest 35-year indexed wage history (highest 35 years’ wages divided by 420). This amount is called your Average Indexed Monthly Earnings (AIME). This number is then run through a blend point formula to adjusts higher income earners down and lower income earners up. This amount is called the Primary Insurance Amount (PIA). This PIA number is the amount of your Social Security pension when you reach full retirement age subject to limits. Please see How Is Social Security Calculated? for an example.

What If I Continue to Work While Receiving Social Security?

If you work and you receive Social Security at the same time, you may have some of your Social Security withheld if you make above the threshold. Don’t worry, the amount withheld from your Social Security will be paid out to you later.

There are two income thresholds that you need to worry about, early retirement ages 62 through the year before your full retirement age and the year in which you reach full retirement age (the SSA calls this normal retirement age or NRA)

If you’re 62 and make above $16,920 in 2017, your Social Security will be withheld at a rate of $1 for every $2 you make above the limit. Let’s say you make $32,920 in 2017 and you told the SSA that you plan to make this amount ahead of time when you filed. They will withhold the first $8,000 in Social Security payments during 2017 ($16,000 made above the limit divided by 2), then pay you the regular payment amount for the rest of the year. If your regular payment amount at age 62 is $1,000 per month, the SSA will withhold your payment from January – August, then start paying you $1,000 in September until the end of the year. Then when you hit full retirement age, you’ll get the $8,000 that was withheld when you were 62 but it will be recalculated into your monthly payment.

There’s a lot in that last paragraph. If you have specific questions please sign up to my email here and email me your scenario. Just reply to my welcome email and make sure to put “Social Security Question” in the subject line for faster replies.

The chart below shows the income thresholds before the SSA will start withholding.

income threshold for social security

How Much Does Social Security Increase After I Reach Full Retirement Age?

Social Security increases monthly payments by 8% per year for every year after your full retirement age up to age 70. If your Social Security payment is $2,000 per month at full retirement age 66, then your monthly payment will increase to $2,750 at age 70 if you wait to file.

Delaying retirement isn’t for everyone. Some people don’t want to keep working that long. Some people prefer to take Social Security at age 62 and work part time. In some cases, it may make sense to use IRA accounts to cover expenses until age 70, then file for a higher Social Security amount at 70.

Do I have to Pay State Tax on My Social Security?

Some state tax Social Security, some tax a portion of your benefits, and other don’t tax Social Security at all.

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