Maximizing Social Security Benefits: Key Considerations for Retirement Planning

Entering retirement is exciting, but it’s also a time that requires thoughtful planning. Without a paycheck to support your financial obligations and goals, you’ll need to rely on a number of different sources: 401(k) withdrawals, interest and dividends from investments, pension plan payouts, and, of course, Social Security benefits.

Each income source comes with its own benefits and drawbacks, as well as tax treatment. Because of this, you and your advisor should create a strategic withdrawal strategy that balances preservation and tax consciousness with your retirement goals (like home buying, travel, philanthropy, legacy planning, etc.).

Social Security benefits, for example, can serve as a foundational element of your retirement income strategy since they are guaranteed to last the remainder of your lifetime and are adjusted for inflation annually. Let’s examine how you can maximize your Social Security benefits as you start to build your income strategy for retirement.

Understanding Full Retirement Age

The Social Security Administration (SSA) has assigned you a “full retirement age” based on the year you were born—ranging between age 66 and 67.  If you were born in 1960 and later, for example, your full retirement age is 67. If you wait to begin collecting Social Security benefits until age 67, you will be entitled to your full benefit amount. However, the SSA also enables individuals to either begin collecting benefits early or delaying benefits until age 70.

Early Retirement Benefits

You may begin collecting Social Security benefits as early as age 62. However, the earlier you start receiving those benefits, the more they’ll be reduced. If you begin collecting as soon as you turn 62, for example, your benefits would be reduced by 30%—meaning if your full benefits were $1,000, you’d receive $700 instead.

Each month you wait to begin collecting benefits, the less of a reduction you’ll experience: 

• Age 62: -30%
• Age 63: -25%
• Age 64: -20%
• Age 65: -13.3%
• Age 66: -6.7%

Here’s a calculator to determine what percentage of your benefits you’d receive if you chose to begin collecting before (or after) full retirement age.

Delayed Retirement Benefits

For every month you wait to begin taking benefits after full retirement age, you can receive delayed credits (up until age 70) totaling 8% each year.¹ 

If you wait until age 70, you’ll receive 124% of your monthly benefits. Using the same example above, if you’re entitled to $1,000 at full retirement age, delaying your credits until age 70 would mean receiving $1,240 instead.

Which Is the Right Option for Me?

You and your advisor should work together to determine when, exactly, you should begin receiving Social Security benefits—as there are a number of factors to consider.

If you can support your first few years of retirement using other income sources, for example, it may be worth delaying payments to receive the additional credits. If you’re struggling to make ends meet early on in retirement, taking benefits sooner may be a better option than taking on high-interest debt. Or, if you have a medical diagnosis or family history of medical concerns, it might not make sense to delay receiving payments.

Additional Social Security Benefits

Members of your family may be entitled to Social Security benefits as well.

Your spouse may qualify for spousal benefits if they are:¹ 

• Older than 62, or
• Younger than 62, but have a qualifying disability or care for a child under 16, or
• Older than 62 and divorced from you (and meet other divorced spouse criteria).

Typically, your spouse may receive up to half of your benefits if they have low earnings or never worked.

You may receive benefits for your children as well if they are:¹  

• Under 18 and unmarried, or
• Under 19 and a full-time grade school student, or
• Over the age of 18, unmarried, and diagnosed with a disability that began before they reached age 22.

If your children meet these qualifications, they may be entitled to benefits up to half of your full benefit.

Are Social Security Benefits Taxed?

Around 40% of people who receive Social Security are required to pay taxes on them.¹ The SSA determines this by having you calculate your “combined income” which is the total of your:² 

• Adjusted gross income
• Tax-exempt interest income
• Half of your Social Security benefits

Once you calculate your combined income, here’s how that will impact the tax liability of your Social Security benefits:¹ 

Looking to Strategize Your Social Security Benefits?

Developing a retirement income plan that accounts for your life expectancy, tax obligations, and retirement goals gets complicated, which is why working with a professional can be helpful. As you continue preparing for retirement, we invite you to reach out to our team at Measured Wealth, as we can help you maximize the impact of your Social Security benefits based on your unique goals and situation.

^Sources:

^{1https://www.ssa.gov/pubs/EN-05-10035.pdf}

^{2https://faq.ssa.gov/en-us/Topic/article/KA-02471}