Maximizing one’s Social Security may not always be the best objective. Claiming one’s benefits at the “right time”, in relation to their specific goals, personal circumstances, and financial situation, can move them forward with more confidence and assurance.
Understanding the rules of Social Security claiming is crucial. The timing has a significant effect on the total income you receive over your lifetime.
Key Facts to Know About Social Security
- Created in 1935 by the Social Security Act. This program has been in existence for 90 years.
- In 1935, the average life expectancy in the U.S. was:
- All Races (Both Sexes): 61.7 years
- White Male: 61.0 years
- White Female: 65.0 years
- Black Male: 51.3 years
- Black Female: 55.2 years
- Social Security is designed to provide supplemental retirement income through a social insurance program that offers lifetime benefits to retirees, disabled workers, and the survivors of deceased workers.
- In 1935, roughly half the working population was signed up and contributing to the program, but it was five years later, in January 1940, before the first monthly payment was made.
- Social Security benefits are inflation-adjusted to maintain their purchasing power over time.
- Without congressional action, current projections on the solvency of the Social Security trust funds indicate that reserves are expected to be depleted in 2034, one year sooner than initially projected in 2021.
Early, On-time, or Later?
Qualified retired workers reach the eligibility age to claim benefits at 62. For those who choose to begin benefits at that time, they experience a permanent reduction in their benefits for life. As an example, for someone born in 1960 or later, claiming at age 62 would result in a nearly 30% reduction in benefit compared with claiming at your Full Retirement Age (FRA) of 67.
If a qualified retired worker chooses to delay claiming their benefit past FRA, then those individuals receive a permanent increase to their benefit amount. For each year of delay up to age 70, the benefits increase by 8% simple interest for each full year delayed. This increase is known as a delayed retirement credit.
Top Five Considerations for Claiming Strategies
- Earnings Test Prior to FRA. For 2025, if you’re collecting Social Security before FRA, the annual earnings limit is $23,400. Benefits are reduced by $1 for every $2 earned above this amount. If you are in the year you reach FRA, then the annual earnings limit of $62,160 applies. No earnings limit applies once you’ve reached your full retirement age.
- Life Expectancy. If you have longevity in your family and expect to live a long life, delaying benefits can potentially lead to a higher total lifetime payout. On the other hand, if you have health issues or a family history of shorter lifespans, claiming earlier may make sense.
- Primary Retirement Income Sources. Look at the big picture of your retirement finances. If you have enough in retirement savings and other income streams coming in, you might be able to delay claiming and accumulate delayed retirement credits. View Social Security as an asset in your retirement portfolio. You may want to work with a financial and tax professional to consider Roth Conversion(s) prior to claiming.
- Social Security is Not Taxable by Itself. A portion of your Social Security benefits may be subject to federal income tax, depending on the amount of taxable income you receive from rental properties or other income-generating assets.
- Maximizing a Benefit for a Surviving Spouse. If you’re married, coordinating claiming strategies with your spouse can significantly maximize combined lifetime benefits, and this is something you can get professional guidance on through a comprehensive retirement income plan.
Steps to Get Started
Because retirement can be tricky to envision, getting guidance from one of our professional financial advisers can also be a crucial step. They can create a financial plan for you that considers and guides you through the best solutions for making the best claiming decision in the context of your complete financial picture.
– Michael Wallin, Certified Financial Planner ™. For more information, please see www.panthrex.com or call 615-236-2220.
