Developing Your Social Security Strategy

For those of you approaching your 60’s, it’s time to start developing your Social Security strategy. For most people, Social Security will be an important part of your retirement income. First, I’d like to list a few important reminders when thinking about when you should claim Social Security.

1.       If you know exactly what age you will die, then it would be easy to calculate the best age to claim it. Unfortunately, we don’t know so it does becomes more of a forecast than an absolute.

2.       It’s a pretty good deal for most people if you can wait. If someone’s FRA (full retirement age) is age 67 and they start taking Social Security at age 62, rather than waiting until your full retirement age (FRA), you can expect a 30% reduction in monthly benefits with lesser reductions as you approach FRA. Thus, with each year you wait after age 62, you can expect around a 5% increase over the previous year. It is pro-rated, so claiming it at age 62 ½ would result in a reduction of 27 ½ per cent versus your payment a full retirement age. If you delay payments after your FRA, it’s an even better deal. Your payment would increase 8% for each year you wait.

3.       Waiting to age 70 to claim Social Security benefits is just not a viable option for many people.

4.       There are tax advantages to Social Security payments. The portion of benefits that are taxable depends on the taxpayer's income and filing status.

Fifty percent of a taxpayer's benefits may be taxable if they are:

·       Filing single, head of household or qualifying widow or widower with $25,000 to $34,000 income.

·       Married filing separately and lived apart from their spouse for all of 2020 with $25,000 to $34,000 income.

·       Married filing jointly with $32,000 to $44,000 income.

Up to 85% of a taxpayer's benefits may be taxable if they are:

·       Filing single, head of household or qualifying widow or widower with more than $34,000 income.

·       Married filing jointly with more than $44,000 income.

·       Married filing separately and lived apart from their spouse for all of 2021 with more than $34,000 income.

·       Married filing separately and lived with their spouse at any time during 2021.

And don’t forget about state taxes too. Some states are very friendly to social security income.

So, how do you start to decide when to take social security? First, if you are forced into retirement (or choose to retire early) and you absolutely need this money to pay the bills, then you’ll have to claim it when you need it (which may be as early as age 62). Another situation where claiming Social Security early involves your health. If you do have health issues and it’s clear to you that your life expectancy is shorter than normal, then claiming early may make sense (use it or lose it).

Also, if you choose to retire before FRA and you have not accumulated side funds sufficient to “make up” the amount of social security benefits that you could get, then you should claim it.  For instance, if you retire at age 65 with a pension but little other savings, it may make sense for you to claim it then.

If you are healthy and you have more than adequate retirement funds to draw income off, this is the situation where it makes sense to wait all the way to age 70.

 The first step I recommend for most people is to establish a “my Social Security” account at ssa.gov. It’s important to verify the income they are using for you each year as that can impact your benefit if there is a mistake. You can also see what your future benefits are projected to be at this time. This will help you to decide when it makes sense to claim. Lastly, there is a vast amount of information there so you can educate yourself prior to making your election. By the way, deciding on Social Security timing for couples involves another entire article. More to come on that.

Enjoy the Journey!