When Should You Claim Social Security Benefits to Maximize Your Income?

Reviewed by Michael Landsberg, CIO, Landsberg Bennett Private Wealth Management.

Planning for retirement involves many crucial decisions, and one of the most significant is determining the optimal time to claim your Social Security benefits. Social Security can be a vital part of your retirement income, helping you maintain your standard of living after you stop working.

Even Americans who are well-prepared in terms of investments consider Social Security as a significant factor in their retirement income strategy. However, deciding when to start receiving these benefits can be complex. The age at which you claim can substantially impact the amount you receive monthly and over your lifetime.

This article aims to guide you in determining the ideal time to claim your Social Security benefits. Whether you're nearing retirement or planning ahead, understanding these elements will help ensure you make an informed decision that aligns with your financial goals. Let's explore how you can optimize your Social Security benefits for a more secure retirement.

What is Social Security and How Does It Function?

Social Security is a federal program designed to provide financial assistance to retirees, disabled individuals, and survivors of deceased workers. Established in 1935 under the Social Security Act, it aims to offer a safety net for individuals and families, ensuring a basic level of income in times of retirement, disability, or loss of a family breadwinner. The program is funded primarily through payroll taxes collected under the Federal Insurance Contributions Act (FICA) and the Self-Employed Contributions Act (SECA).

When you work, you and your employer each pay 6.2% of your earnings up to a certain limit ($160,200 in 2023) into Social Security. Self-employed individuals pay 12.4%. These contributions are used to fund current beneficiaries, with excess funds held in the Social Security Trust Fund. When you become eligible to receive benefits, the funds are drawn from the Trust Fund.

Read more here: Strategies for maximizing Social Security benefits

How Are Benefits Calculated Based on Lifetime Earnings?

Social Security benefits are calculated based on your lifetime earnings, specifically focusing on your 35 top-earning years. The calculation process involves several steps:

• Indexing Earnings: Your earnings are adjusted for changes in average wages over time, a process called indexing. This ensures that your past earnings are comparable to current wage levels.
• Calculating Average Indexed Monthly Earnings (AIME): The SSA calculates your AIME by averaging your indexed earnings over your 35 top-earning years. If you have fewer than 35 years of earnings, zeros are added to make up the difference, which can lower your AIME.
• Determining Primary Insurance Amount (PIA): Your PIA is the base amount of benefits you are entitled to receive at your full retirement age (FRA). The PIA is calculated using a formula that applies different percentages to portions of your AIME, known as bend points. For example, in 2023, the formula is: 90% of the first $1,115 of your AIME 32% of AIME over $1,115 and up to $6,721 15% of AIME over $6,721
• Adjusting for Age of Claim: Your actual benefit amount will be adjusted based on the age you start claiming. If you claim before your FRA, your benefits will be reduced to account for the longer period you'll receive them. Conversely, if you delay claiming past your FRA, your benefits will increase due to delayed retirement credits, up to age 70.

The Role of the Social Security Administration (SSA)

The Social Security Administration (SSA) is the federal agency responsible for administering the Social Security program. The SSA handles several key functions:

• Processing Applications: The SSA processes applications for retirement, disability, and survivor benefits. This includes verifying your eligibility and calculating your benefit amount.

• Maintaining Earnings Records: The SSA keeps a record of your earnings throughout your career, which is used to calculate your benefits. It's crucial to periodically review your Social Security Statement to ensure your earnings record is accurate.

• Disbursing Benefits: Once you begin receiving Social Security benefits, the SSA is responsible for disbursing your monthly payments. These payments can be received via direct deposit or a debit card.

• Providing Information and Assistance: The SSA offers various resources to help you understand your benefits and the application process. This includes online tools, informational booklets, and customer service representatives who can answer your questions.

• Ensuring Program Integrity: The SSA works to prevent fraud and ensure that only eligible individuals receive benefits. This involves monitoring for improper payments and taking corrective action when necessary.

Understanding how Social Security functions, how benefits are calculated, and the role of the SSA, will enable you to make informed decisions about your retirement planning. Social Security is a complex program, but taking the time to understand its basics can help you maximize your benefits and ensure a more secure financial future.

Retirement Ages and Social Security Benefits

The age at which you choose to start receiving Social Security benefits can significantly affect the amount you receive. Here are the primary options:

Early Retirement Age (62)

• You can start claiming Social Security benefits as early as age 62. However, claiming at this age means you will receive a reduced benefit amount for the rest of your life.
• The reduction is substantial. If you claim at 62, your benefit could be reduced by up to 30% compared to what you would receive if you waited until your Full Retirement Age (FRA).
• This reduction occurs because you will be receiving benefits for a longer period. For example, if your FRA is 67, claiming at 62 results in a 30% reduction.

Full Retirement Age (FRA)

• Your FRA is the age at which you are entitled to receive 100% of your Social Security benefits. This age varies depending on your birth year:
• If you were born between 1943 and 1954, your FRA is 66.
• For those born between 1955 and 1959, FRA increases gradually from 66 and 2 months to 66 and 10 months.
• If you were born in 1960 or later, your FRA is 67.
• At your FRA, you receive your full Primary Insurance Amount (PIA) without any reductions or increases.

Delayed Retirement Age (70)

• You can delay claiming benefits beyond your FRA up until age 70. For each month you delay, your benefits will increase due to delayed retirement credits.
• The increase is approximately 8% per year. For example, if your FRA is 67 and you delay claiming until age 70, you could receive a 24% increase in your monthly benefit.
• After age 70, there are no additional increases, so it doesn’t benefit you to delay further.

How Benefits Increase or Decrease Based on Age of Claiming

The decision on when to claim Social Security benefits affects the monthly benefit amount you receive:

Claiming at 62

• Benefits are reduced because you will be receiving them for a longer period. The reduction is permanent. For example, if your FRA is 67 and your PIA is $1,000, claiming at 62 would reduce your monthly benefit to approximately $700.
• The reduction percentage depends on how many months before your FRA you start claiming. For example, if your FRA is 67, claiming at 62 results in a 30% reduction, but claiming at 63 results in about a 25% reduction.

Claiming at FRA

• You receive 100% of your PIA. Using the same example, if your PIA is $1,000, you would receive $1,000 per month if you claim at your FRA.
• This age offers a balance between receiving benefits earlier and maximizing your monthly amount.

Claiming at 70

• Benefits are increased due to delayed retirement credits. For each year you delay past your FRA, your benefit increases by approximately 8%.
• If your FRA is 67 and your PIA is $1,000, claiming at 70 would increase your monthly benefit to approximately $1,240.

Illustration of Benefit Changes

Assume your Full Retirement Age (FRA) is 67 and your Primary Insurance Amount (PIA) is $1,000:

• At age 62: Your monthly benefit would be approximately $700 (a 30% reduction).
• At age 67: Your monthly benefit would be $1,000 (no reduction or increase).
• At age 70: Your monthly benefit would be approximately $1,240 (a 24% increase).

These calculations show how the age at which you claim Social Security impacts your monthly benefit. Claiming early results in reduced benefits, while delaying increases them. The optimal age to claim depends on your personal circumstances, such as your health, financial needs, and retirement plans. Understanding these options helps you make an informed decision to maximize your retirement income.

What is the Ideal Age to Claim Your Social Security Benefits?

The "ideal age" to claim Social Security benefits is a personalized decision that depends on various individual factors and goals.?

There isn't a one-size-fits-all answer; instead, it involves evaluating your specific situation to determine the optimal strategy for maximizing your retirement income. But if you want to maximize your social security benefits, retiring at full retirement age of 70 will get you 100% of the retirement benefits.

The key is to balance your financial needs, health considerations, life expectancy, and other personal circumstances.

Understanding Variability Based on Individual Circumstances and Goals

Personal Health and Life Expectancy

• If you are in good health and have a longer life expectancy, delaying your benefits can result in higher monthly payments for the rest of your life, thereby maximizing your lifetime income.
• Conversely, if you have health concerns or a shorter life expectancy, claiming benefits earlier might be more advantageous to ensure you receive them while you can still enjoy them.

Financial Situation and Immediate Needs

• Those with sufficient retirement savings and other income sources may choose to delay claiming Social Security to benefit from increased monthly payments.

• If you need additional income immediately upon retirement, claiming benefits earlier might be necessary to meet your financial needs, despite the reduced monthly amounts.

Retirement Goals and Lifestyle

• Your retirement plans and lifestyle choices also play a significant role. If you plan to continue working past traditional retirement age, delaying Social Security benefits might be beneficial.

• On the other hand, if you wish to retire early and enjoy leisure activities, claiming benefits at an earlier age might be a more suitable option.

The ideal age to claim Social Security benefits is not a one-size-fits-all decision. It requires a thorough evaluation of your personal health, financial situation, retirement goals, and family considerations. By carefully analyzing these factors, you can determine the most suitable time to start receiving your Social Security benefits, ensuring that you make the most of this critical component of your retirement income.

Read more here: Retiring Early? Here's What You Need to Consider

Factors to Consider

How Long Do You Plan to Work?

If you plan to continue working past the early retirement age of 62, it’s essential to consider how your employment income will affect your Social Security benefits.?

Working while receiving benefits before reaching your Full Retirement Age (FRA) can result in a reduction of your monthly benefits.?

The Social Security Administration has an earnings test that applies to those who claim benefits early and continue to work. For 2023, if you are under FRA and earn more than $21,240, your benefits will be reduced by $1 for every $2 earned above this limit.?

In the year you reach your FRA, the limit increases to $56,520, with a reduction of $1 for every $3 earned over this threshold. Once you reach FRA, there are no reductions, regardless of your earnings.

Income Levels and Potential Penalties

High earners need to be particularly mindful of these limits to avoid significant reductions in their benefits. If you expect your income to be substantially higher than the earnings limit, delaying benefits until reaching FRA can help avoid penalties and maximize your monthly benefit amount.

Marital Status (Spousal, Survivor, Divorced)

Spousal Benefits

If you are married, you may be entitled to spousal benefits, which can be up to 50% of your spouse’s Primary Insurance Amount (PIA) if claimed at your FRA. If you claim spousal benefits before your FRA, the amount will be reduced.?

It can be beneficial for the lower-earning spouse to claim partner benefits, particularly if the higher-earning spouse delays their own benefits to increase their future monthly amount.

Survivor Benefits

Survivor benefits are available to the widow or widower of a deceased worker. These benefits can be up to 100% of the deceased spouse’s benefit if claimed at the survivor’s FRA. If you are a surviving spouse, you can choose to claim survivor benefits as early as age 60 (or 50 if disabled), though the benefits will be reduced. Delaying until FRA can provide the full survivor benefit amount.

Benefits for Divorced Individuals

If you are divorced, you may be eligible for benefits based on your ex-spouse’s work record, provided the marriage lasted at least 10 years and you are currently unmarried. Divorced individuals can claim spousal benefits at FRA, which can be up to 50% of the ex-spouse’s PIA, or reduced benefits if claimed earlier. This can be a strategic option for maximizing retirement income.

Taxation of Social Security Benefits

Social Security benefits may be subject to federal income taxes depending on your combined income (adjusted gross income + nontaxable interest + half of your Social Security benefits).?

If your combined income exceeds $25,000 for an individual or $32,000 for a married couple filing jointly, up to 50% of your benefits may be taxable. If your combined income exceeds $34,000 (individual) or $44,000 (couple), up to 85% of your benefits may be taxable.

Wrapping up

Determining the ideal time to claim your Social Security benefits is a critical decision that can significantly impact your retirement income. By understanding the basics of Social Security, the different ages at which you can claim benefits, and the implications of claiming early, at full retirement age, or later, you can make an informed choice tailored to your needs.

Key Points

• Claiming Social Security benefits at different ages (62, FRA, 70) affects the amount you receive monthly and over your lifetime.

• The concept of the "ideal age" to claim benefits varies based on personal circumstances, including health, financial needs, and retirement goals.

• Factors such as how long you plan to work, your marital status, and the impact of federal taxes play significant roles in your decision-making process.

Importance of Individualized Planning

Every individual's situation is distinct, making it essential to consider your specific circumstances when planning for Social Security. What works for one person may not be the optimal strategy for another. Evaluating your health, financial resources, employment plans, and family situation will help you determine the most advantageous time to start receiving benefits.

Seek Professional Advice

Given the complexity and long-term impact of this decision, seeking professional advice can be invaluable. Financial advisors can provide personalized strategies that align with your overall retirement plan, helping to ensure you maximize your Social Security benefits and achieve financial security in retirement.

By taking a thoughtful and informed approach, you can optimize your Social Security benefits, contributing to a more comfortable and secure retirement.

Disclaimer:

Landsberg Bennett is a group comprised of investment professionals registered with Hightower Advisors, LLC, an SEC registered investment adviser. Registration as an investment adviser does not imply a certain level of skill or training. Advisory services are offered through Hightower Advisors, LLC. All information referenced herein is from sources believed to be reliable. Landsberg Bennett and Hightower Advisors, LLC have not independently verified the accuracy or completeness of the information contained in this document. Landsberg Bennett and Hightower Advisors, LLC or any of its affiliates make no representations or warranties, express or implied, as to the accuracy or completeness of the information or for statements or errors or omissions, or results obtained from the use of this information. Landsberg Bennett and Hightower Advisors, LLC or any of its affiliates assume no liability for any action made or taken in reliance on or relating in any way to the information. This document and the materials contained herein were created for informational purposes only; the opinions expressed are solely those of the author(s), and do not represent those of Hightower Advisors, LLC or any of its affiliates. Landsberg Bennett and Hightower Advisors, LLC or any of its affiliates do not provide tax or legal advice. This material was not intended or written to be used or presented to any entity as tax or legal advice. Clients are urged to consult their tax and/or legal advisor for related questions.

Hightower Advisors, LLC is an SEC registered investment adviser. Securities are offered through Hightower Securities, LLC member FINRA and SIPC. Hightower Advisors, LLC or any of its affiliates do not provide tax or legal advice. This material is not intended or written to provide and should not be relied upon or used as a substitute for tax or legal advice. Information contained herein does not consider an individual’s or entity’s specific circumstances or applicable governing law, which may vary from jurisdiction to jurisdiction and be subject to change. Clients are urged to consult their tax or legal advisor for related questions.