Making the Most of Social Security as Part of Your Retirement Plan
Dire predictions about the demise of Social Security have been made for decades, yet the program continues. While there might be changes in the future—including increasing the retirement age or adjusting the benefits formula—the fact remains that many retirees need Social Security to supplement at least part of their income.
Social Security is an important part of your overall retirement picture, providing you with a baseline for monthly income. As you consider how to move forward, here’s what you need to know about Social Security for retirement.
Deciding When to Claim Social Security Benefits
The first thing to consider when using Social Security for retirement is deciding when to start taking benefits. You can start drawing your benefits at age 62, or you can put off receiving your first Social Security check until age 70 at the latest.
However, it’s important to note that the age you begin taking benefits impacts the amount you receive each month. The earlier you take Social Security, the less you receive. The only way to get your full benefit is to begin claiming Social Security at your “full retirement age” (FRA).
Your FRA is based on your birth year, and, for most people, it’s between 66 and 67. For each year that you claim benefits before your FRA, your monthly amount is reduced. The table below, from the Social Security Administration, illustrates FRA and benefits reductions.
| At Age 62 | |||
| Year of Birth | Full (normal) Retirement Age | A $1000 retirement benefit would be reduced to | The retirement benefit is reduced by |
| 1943-1954 | 66 | $750 | 25.00% |
| 1955 | 66 and 2 months | $741 | 25.83% |
| 1956 | 66 and 4 months | $733 | 26.67% |
| 1957 | 66 and 6 months | $725 | 27.50% |
| 1958 | 66 and 8 months | $716 | 28.33% |
| 1959 | 66 and 10 months | $708 | 29.17% |
| 1960 and later | 67 | $700 | 30.00% |
As you can see, if your FRA is 67 and you begin taking benefits at age 62, you’ll see a 30% reduction in your monthly benefit.
Choosing to take benefits after your FRA increases your monthly benefit. For example, if you delay taking Social Security for 12 months beyond your FRA, you’ll get 108% of your regular benefit. Delay until age 70, and you’ll receive 132% of your regular monthly benefit
If you’re working during retirement, or if you’re trying to reduce required minimum distributions by drawing on a traditional retirement account, putting off taking Social Security until age 70 can make sense. You benefit from a higher monthly income from Social Security when that time comes.
Should You Take Social Security Early?
You shouldn’t assume that delaying claiming your Social Security benefits until age 70 is the right plan for everyone. Some items to consider as you create your Social Security strategy include:
● Traditional retirement accounts: If you have other accounts, such as traditional retirement accounts that have required minimum distributions, it can make sense to put off taking Social Security to draw down your balances.
● Roth accounts: When a portion of your money is in a Roth account, you might decide it makes more sense to take your Social Security early and pair that with untaxed Roth withdrawals.
● Health concerns: You might decide to take early withdrawals due to health or longevity concerns. At age 65, you need to enroll in Medicare if you’re drawing Social Security.
● Survivor benefits: If you’re eligible for survivor benefits, you might need to plan when to take your Social Security around what you’re receiving from a deceased spouse’s Social Security.
● If you need the money: In some cases, you might need the money immediately due to being laid off or for other reasons. In that case, claiming Social Security benefits immediately might make sense.
All these factors can interact in different ways and be part of your strategy. When deciding when to take Social Security benefits, consider your other accounts and your order of access. Each person has different circumstances to consider.
Other Factors that Can Impact Your Benefits
As you consider your benefits, don’t forget to review other factors that can impact how much you receive each month.
● Marital status: If you have a spouse, run the numbers to see if it makes sense to claim your own benefits or spousal benefits. You and your spouse should see what combination makes the most sense for your situation.
● Divorce: You’re entitled to spousal benefits of an ex if you were married at least 10 years and you aren’t currently remarried. Check to see if it’s a good move to claim spousal benefits instead of your own, based on your work history and your ex’s history.
● Working in retirement: A job in retirement can reduce the amount you receive monthly, depending on whether you’re at FRA. Plus, if you’re still working, you can potentially continue to increase your total benefit amount.
Don’t Forget About Taxes on Social Security Benefits
You might have to pay taxes on your Social Security benefits. They are taxable at the federal level, although many states don’t levy taxes on your Social Security benefits.
Review your tax situation, including how you’re taxed on any income from working in retirement, traditional retirement account distributions and Social Security benefits. Incorporating a tax strategy as you claim Social Security benefits and plan your retirement is part of making sure each dollar goes as far as possible.
Conclusion
Social Security amounts to longevity insurance. You pay into the program during your working life and receive benefits later. However, it’s important to remember that Social Security was never meant to be a complete replacement for income. Instead, it’s designed to provide a baseline of income. If you want a comfortable retirement, you likely need other financial resources, such as retirement accounts, annuities, business income or other cash flows.
As you plan for retirement and incorporate your Social Security benefits, make sure you understand the annual changes that come with the program. For example, there’s usually a cost-of-living adjustment (COLA) based on inflation. Additionally, there are changes to the tax cap and earning limits each year. If you continue to work during retirement, understanding the earning limits and tax consequences is an important part of your ongoing planning.
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