Understanding Social Security: Considerations for Maximizing Your Benefits

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Caleb Bjerk

When Social Security was first introduced in 1935, its primary purpose was to act as a safety net for retirees with inadequate savings, rather than serving as their main income source during retirement. Back then, life expectancies were shorter, and retirees often relied on pensions for support. However, the economic landscape of today has brought about significant changes in attitudes toward Social Security, and pensions have largely become a thing of the past. Now, Social Security benefits account for approximately 30% of retirees’ income, making maximizing your Social Security benefits a vital aspect of your retirement plan.

Before we explore different strategies for maximizing your Social Security benefits, let’s define a couple of useful terms that are specific to Social Security:

  1. Full Retirement Age (FRA): This is the age when you can start claiming benefits without a decrease in your monthly benefit amount. For most people, this is typically around the age of 67, but you are able to verify this on your Social Security statement.
  2. Primary Insurance Amount (PIA): This is the monthly benefit amount you are eligible to claim at your FRA.

Continue reading for valuable tips that can help you make the most of these benefits and build greater retirement income security.

Maximizing Social Security Benefits Tip #1: Consider Delaying Your Benefits

The most important consideration when claiming your Social Security benefits is that you’ll want to make strategic decisions about your timeline. There are three options to consider for the timing of your benefits: early claims as early as your age of 62, on-schedule claims at your FRA, and delayed claims up until your age of 70. Each option comes with its own set of advantages and drawbacks, necessitating thoughtful evaluation based on your unique financial situation. Let’s briefly consider some pros and cons of each method:

Early Claims:

  • Pros: allows you to start receiving monthly income earlier and lessen withdrawals from your retirement savings. This might be the best option if you have a short life expectancy.
  • Cons: results in a permanent reduction of the benefits you receive. This reduction can be up to 30% of your PIA.

On-Schedule Claims:

  • Pros: allows you to receive your full PIA without any reduction in benefits
  • Cons: does not take advantage of further increases you could receive through delaying your benefits. It might be better to claim benefits early if you have a short life expectancy and delay benefits if you have a long life expectancy.

Delayed Claims:

  • Pros: allows you to take full advantage of the 8% annual increase to your Social Security benefits after your FRA and until your age of 70
  • Cons: results in greater reliance on your retirement savings and investments before you claim Social Security. This might not be the best option if you have a short life expectancy.

Assuming normal life expectancy,  choosing to delay your benefits is generally the route to take, if you are able to live off your other retirement savings until you claim your benefits. This strategy typically results in the highest monthly income amount and the largest estate value over a long period of time. As you can see, picking the right approach is crucial to optimizing your Social Security benefits and creating a more comfortable retirement.

SEE ALSO: The Importance of Tax Planning in Your Financial Plan


Maximizing Social Security Benefits Tip #2: Increase Your Earnings

The cornerstone of calculating your Social Security benefits lies in your lifetime earnings. To maximize these benefits, your focus should revolve around steadily increasing your income during your working years. The concept is straightforward: higher earnings result in higher average indexed monthly earnings (AIME), a critical factor in determining your ultimate benefit amount. Dedicate efforts to invest in your career development, explore opportunities for professional growth, and strive to reach your full earning potential. Taking proactive steps in this direction will increase your benefits and provide greater financial security when you reach retirement.

Maximizing Social Security Benefits Tip #3: Optimize Spousal Benefits

Did you know that you may be able to claim Social Security benefits other than your own? If you’re married, divorced, or widowed, there is potential to claim spousal benefits based on your partner’s earning history. Crafting an optimal Social Security strategy as a couple requires delving into the rules and requirements governing these spousal benefits. By exploring various claiming options, you can maximize the combined benefits for both you and your spouse.

While there are too many scenarios to outline in one blog post, consider one strategy: if one spouse earns more, they might choose to delay claiming benefits up to age 70 to maximize their own payments.  Simultaneously, the other spouse could claim benefits once eligible, typically at their FRA to avoid any reduction in monthly benefits. Later once the higher earning spouse also starts claiming Social Security benefits, the lower earning spouse may become eligible for spousal Social Security benefits instead of just continuing to receive Social Security benefits based on his or her lower earnings record.  The spousal benefit can be as much as half of the higher earner’s PIA depending on the spouse’s age at retirement. Consequently, the Social Security benefit paid to the lower-earning spouse will switch to be the higher of his/her retirement benefit based on his/her own earnings record OR the spousal benefit. This coordinated effort not only fine-tunes individual benefits but can also boost your overall retirement income as a couple. By understanding how your spousal benefits work together, you can make the most of your Social Security and build a stronger financial foundation for the future.

Maximizing Social Security Benefits Tip #4: Be Smart with Your Tax Strategy

One common mistake among retirees is underestimating the potential tax impact on their Social Security benefits and retirement savings withdrawals. Depending on your retirement income, this oversight in planning can lead to taxation on up to 85% of your Social Security benefits. To shield yourself from this potential burden, it’s essential to assess your provisional income once you start claiming benefits. This provisional income is computed using your adjusted gross income, any nontaxable interest, and half of your Social Security benefits.

One strategy you might be able to use alongside delaying Social Security benefits is Roth conversions. During lower-income years, you might consider completing Roth conversions. Even though the amount you convert will be taxed, the Roth IRA dollars will grow tax-free, can be accessed tax-free in the future, and are not subject to Required Minimum Distribution rules like Traditional IRAs and 401(k)s.

SEE ALSO: Are You Making the Most of 401(k) Matching Opportunities?


Concluding Thoughts on Maximizing Your Social Security Benefits

Effectively navigating the Social Security planning process requires a thorough understanding of the system and how each strategy aligns with your overall financial objectives. As you chart your course, remember that every person’s circumstances are unique, making it important to evaluate your options in consultation with financial experts who can provide customized guidance. By adopting the appropriate approach and seeking personalized advice, you can unlock the full potential of your Social Security benefits.

As you navigate the retirement planning process, we can help. At Wade Financial Advisory, our team of advisors can guide you through the Social Security planning process. Take this opportunity to explore, strategize, and make the most of your Social Security benefits by reaching out to us today.

This communication contains the opinions of Wade Financial Advisory, Inc. about the securities, investments and/or economic subjects discussed as of the date set forth herein. This communication is intended for information purposes only and does not recommend or solicit the purchase or sale of specific securities or investment services. Readers should not infer or assume that any securities, sectors or markets described were or will be profitable or are appropriate to meet the objectives, situation or needs of a particular individual or family, as the implementation of any financial strategy should only be made after consultation with your attorney, tax advisor and investment advisor. All material presented is compiled from sources believed to be reliable, but accuracy or completeness cannot be guaranteed. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENTS BEAR RISK INCLUDING THE POSSIBLE LOSS OF INVESTED PRINCIPAL.

Wade Financial Advisory, Inc. is an investment adviser registered with the Securities and Exchange Commission. Registration of an Investment Advisor does not imply any level of skill or training. A copy of current Form ADV Part 2A is available upon request or at www.advisorinfo.sec.gov. Please contact Wade Financial Advisory, Inc. at (408) 369-7399 with any questions.

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