Social Security is a key part of retirement planning and it needs to be part of the planning conversations before you retire and make any irreversible decisions regarding Social Security income.
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Social Security is the closest thing many Americans have to a pension, a steady stream of monthly payments that continue throughout their lifetime. In 2023, about 67 million people will start to receive Social Security benefits. Nearly nine out of ten Americans older than 65 were receiving benefits by the end of 2022. But the benefits likely aren’t enough for most people to live on. On average, they represent about 30% of a person’s overall post-retirement income.
For that reason, people need to think about Social Security as one part of their overall retirement plan. Social Security needs to be part of the conversation when you have regular retirement planning meetings, particularly on maximizing monthly and lifetime benefits.
A few key principles can help you ensure that you get every dollar that is due, and that Social Security is an integral part of their overall plan.
Timing is Everything
There are two aspects of timing that have a big swing in a person’s payout: 1) when they stop working and 2) when they file for benefits.
Regarding the first question, the Social Security Administration calculates benefits based on a person’s highest 35 years of indexed wages. If you are thinking of retiring after only 33 years, you need to understand that the government will use zero as the indexed wage for the other two, which in turn will reduce the monthly payout.
Similarly, if you earn a high annual income and continue to work past the 35-year point, you will likely raise the Social Security income benefits because the higher-earning years will replace some of the lower-earning years from earlier in your career. (This holds true even if you have already started receiving Social Security payments. The amount you receive is recalculated each year, using the highest 35 years no matter when those years occurred.)
The second aspect of timing is determining when to file for benefits. Drawing benefits at the earliest possible age, 62, will yield a much lower monthly payout than waiting until the full retirement age, 66 for Baby Boomers, 67 for people born after 1960. Waiting until age 70 to claim benefits will provide the largest monthly payout. Determining whether it’s better to hold out isn’t a straight math problem, based on a person’s health, projected life expectancy, and some other assumptions, but one that makes for an important discussion as it relates to retirement planning.
Factor in Spousal Benefits
Many married couples designate one person to handle the financials, but for Social Security income decisions, both people should be involved so both sides will understand the financial plan in place if either person should pass away. Social Security payments are an important part of that calculation.
For married couples, spousal benefits are equal to 50% of the other person’s benefit. As with one’s own payout, filing early for spousal benefits can reduce the monthly payment, meaning it’s often better to wait. In addition, a person could potentially draw spousal benefits first and delay claiming their own (giving them the benefit of filing later).
Don’t Forget about Taxes
Some people may not realize that a portion of Social Security benefits can be taxable, depending on their income level each year. For people who continue working while drawing benefits, or who have income from other sources, such as real estate or withdrawals from other types of retirement accounts, it is important to understand the tax implications.
For example, people may want to time these withdrawals to minimize the tax burden. Or, for a person who regularly contributes to charity, they may want to potentially donate the stock directly from a retirement account rather than selling the stock, taking the withdrawal, and then donating. Doing so could reduce the person’s income level for a given year and thus potentially lower their tax burden, including on their Social Security benefits.
Monitor and Adjust over Time
Retirement plans don’t have a set-it-and-forget-it option. Just as you need to revisit other aspects of a plan over time, as market conditions and situations change, you’ll need to factor in changes to Social Security payouts as well. In 2023, monthly benefits increased by 8.7% as part of a cost-of-living adjustment, on top of a 5.9% adjustment in 2022. Other elements, such as tax thresholds, get updated yearly. For these reasons, you’ll need to stay on top of the changing rules and have ongoing conversations about how you may be impacted.
In sum, the rules about Social Security are accessible online, but when people look at those rules alone, they may struggle to understand their options. Because the program is designed to be just one part of an overall retirement plan, people to understand how those decisions impact other aspects of their financial situation.
Social Security Fact Sheet 2023, ssa.gov, accessed April 5, 2023.
Emily Sherman and Emily Brandon, “10 Social Security Rules Everyone Should Know,” US News & World Report, March 31, 2023.
Elliot Marks, “Social Security Tips: 8 Ways to Maximize Your Benefits,” SSOfficeLocation.com, accessed April 5, 2023.