For decades, Social Security has been a crucial pillar of financial support for countless Americans in their retirement years. While depending solely on Social Security has never been an advisable retirement strategy, its role as a supplementary income stream remains paramount, especially given the rising cost of living.
While many grasp the idea of Social Security as an additional income source during retirement, there’s a wealth of additional details to consider. These details encompass eligibility criteria, benefit calculation methods, retirement age considerations, and other essential components integral to any retirement plan.
Even though many people don’t dig into these details until retirement looms closer, it’s never too soon to brush up on your financial literacy and become familiar with Social Security claiming strategies that can help maximize your benefits. Ultimately, having this knowledge in the present empowers you to design the retirement you envision.
That’s why we’ve created this guide to help you successfully navigate the years ahead, no matter where you are today!
Understanding the Basics
Let’s begin with the basics. Social Security benefits are available to those who have worked and paid Social Security taxes for at least ten years. Your benefit amount depends on your earnings history and the age you choose to start receiving benefits.
Your Social Security benefits are calculated based on your average indexed monthly earnings (AIME) during your highest-earning 35 years of work. This earnings history is adjusted for inflation to determine your primary insurance amount (PIA), which represents the base amount for your monthly benefit at full retirement age (FRA). However, the actual benefit amount may be more or less depending on when benefits are claimed and other factors.
Your FRA, which may differ from the age you actually retire, is either 66 or 67, depending on your birth year. You can start receiving benefits before or after reaching your FRA, but there are financial implications to consider.
Financial Implications of Early vs. Delayed Claiming
While you can start collecting benefits as early as age 62, opting to do so before reaching your FRA will result in a permanent reduction of up to 30% in your monthly benefit amount.
Conversely, delaying benefits beyond your FRA can result in higher monthly payments. For each year beyond FRA that benefits are delayed, your benefit amount can increase up until age 70.
While claiming Social Security benefits early might be necessary in some cases, waiting to claim benefits and securing a higher benefit amount can provide valuable protection against outliving your savings.
Health and Longevity Considerations
Your health and life expectancy play an important role in helping you decide when to start collecting benefits. Someone in good health with a longer life expectancy and other adequate retirement income sources to maintain their lifestyle might find it beneficial to delay their Social Security benefits.
On the other hand, chronic illnesses, disabilities, or terminal diagnoses might prompt others to prioritize immediate financial needs over maximizing long-term benefits. In such cases, early claiming might be necessary to address medical expenses and maintain quality of life.
While life is inherently unpredictable, considering factors such as your family history, lifestyle, and overall health can help you gauge your life expectancy and make informed decisions about when to claim your Social Security benefits.
Employment Status and Income
While the idea of boosting your income by working while simultaneously claiming Social Security benefits as soon as you hit the eligibility age might seem appealing, it’s essential to first consider the potential consequences.
Claiming benefits before reaching your FRA could temporarily reduce your Social Security benefits if your earned income exceeds a specific limit of $22,320 per year as of 2024. For every $2 earned above this limit, $1 in Social Security benefits is withheld until you reach FRA.
In the year you reach your FRA, a different earnings limit applies. For 2024, this limit is $59,520. For every $3 earned above this limit, $1 in benefits is withheld, but only counting your earnings up until the month before you reach your FRA, not your earnings for the entire year.
Once you reach your FRA, there are no earnings limits, and you can earn any amount without impacting your Social Security benefits.
If circumstances lead you to take your benefits before reaching FRA while still working, you might consider reducing your work hours or adjusting your work schedule to stay below the threshold.
Spousal and Survivor Benefits
Spousal benefits allow spouses to claim Social Security benefits based on their partner’s work record. To qualify for spousal benefits, the primary earner must be eligible for Social Security benefits, and the spouse must be at least 62.
The amount of spousal benefits is typically equal to 50% of the primary earner’s FRA benefit amount but could be less if the spouse doesn’t wait until they reach FRA before collecting from their partner’s benefits.
When there’s been a significant gap in earnings between spouses, choosing the spousal benefit could offer greater benefits than the lower-earning spouse claiming their own benefits.
Couples can maximize their lifetime Social Security benefits by strategically coordinating their claiming decisions. This may involve one spouse delaying benefits to earn delayed retirement credits while the other claims benefits earlier.
When it comes to survivor benefits, they are accessible to widows, widowers, and surviving divorced spouses of deceased workers. To qualify, the survivor has to be at least 60 (or 50 if disabled) and have been married to the deceased worker for at least nine months or is caring for a child from the previous marriage who is under age 16 or disabled.
The amount of survivor benefits is based on the deceased worker’s earnings history. Surviving spouses can receive up to 100% of the deceased worker’s benefit if they claim benefits at their full retirement age.
Social Security Administration Resources
There’s a wealth of information about Social Security (and ideally, you’ll only need a fraction of it). Still, the great news is that the Social Security Administration (SSA) offers a wide range of tools and resources on its website designed to help you understand and maximize your benefits.
One of the SSA’s most valuable resources is your Social Security statement, which provides personalized details about your earnings history and estimated Social Security benefits.
Regularly reviewing your statement can help you track your earnings history, verify the accuracy of your records, and make well-informed decisions about when to claim your benefits.
How Legacy Planning Can Help You Prepare for Retirement
Phew. That was a lot of information (and we only scratched the surface!) on a topic that can get complex and doesn’t typically ignite much enthusiasm. But, that doesn’t diminish its importance in the least.
Social Security can play a key role in your retirement, but there are so many factors unique to you that need to be considered to determine how this benefit fits into your retirement plan — your financial needs and goals, other sources of retirement income, the flexibility you might need to plan for anticipated uncertainties, and your marital status, to name a few.
It can feel daunting to tackle all of this on your own, which is where I come in.
At Legacy Planning, I work closely with my clients, advocating for their financial well-being by carefully evaluating their circumstances and crafting a personalized plan to meet their needs. If you’re ready to gain greater confidence in your financial future, click here to schedule a conversation, and let’s explore the possibility of working together!
Content in this material is for general information only and is not intended to provide specific advice or recommendations for any individual.
