Optimizing Your Social Security Benefit Strategy
Photo Credit: Aaron Burden
The ability to optimize the amount of benefits you will receive from Social Security will depend on your circumstance. Namely, if you are a survivor of another person's Social Security or are on disability, you will be able to receive benefits earlier than most other people. Some people may even wait until full retirement age (FRA) or as late as 70 to start taking benefits. Generally, as is the principle of investment, if you can afford to wait, this will increase the total benefits received over the long term. Below are a few things to consider.
Retirement Age
Your full retirement age (FRA) will be between 66 and 67, depending on the year you were born. Your FRA is the age when you can start receiving benefits without being penalized for early withdrawals and receive the full benefit amount over time.
Taking Social Security Early or Late
There are different reasons why someone may look to start taking Social Security benefits earlier or later. You must be mindful that taking the benefit early comes with penalties. If you decide that you want to take benefits more than three years (36 months) before reaching full retirement age, you will lose five-twelfths of 1% per month until there are only 36 months left. For those remaining 36 months until the full retirement age is reached, you would take on a penalty of five-ninths of 1% each month for the 36 months leading up to full retirement age.
Taking benefits late is another potential option. For example, this strategy could be employed if you work past full retirement age and know you will have income for those years after full retirement age. For example, if you were to retire after this age but before 70, you might be eligible for delayed retirement credit. This added benefit does not account for the cost of inflation but, in most cases, should cover it since the added benefit is 8% per year multiplied by the number of years.
Separately, if you are retired but not taking Social Security, you still need to sign up for Medicare by age 65, as waiting to sign up until after this point might lead to significantly higher health care costs. While it seems attractive to wait and receive more money, it is more important to understand your situation and whether or not this option is feasible.
When Should You Take Benefits
There is much to consider in deciding when to start receiving Social Security. First, it would be best to consider your actual need for benefits by understanding your living expenses and cash liquidity needs. You will have more flexibility with a delayed strategy to maximize benefits if you have an investment portfolio, a pension from an employer, or other passive income that does not require you to be employed to receive.
Another critical factor in deciding when to receive benefits is your life expectancy. Waiting may be ideal for your situation if you believe you will outlast the average life expectancy. On the flip side, if you know you are in poor health or do not think you will outlive the average life expectancy, it may be ideal to take everything you can get as early as possible.
Spousal influence can also be a consideration in that there are more ways to maximize benefits in situations where they might be enjoyed together. The partner that earns the least may want to delay using their benefit. If the higher-earning spouse passes away first, the surviving spouse will benefit more.
The benefit reduction ends the month after you reach full retirement age. If you are still working and decide to take social security early, this could affect the amount you receive. Every $2 earned may result in a deduction of $1 from the total benefit if you have made income over the annual limit of $18,960 in 2021. Furthermore, this reduction is only temporary, with that benefit being returned to your receivable amount once you reach the full retirement age.
Changing Your Mind
If, by chance, you begin withdrawing funds early (at a reduced rate), then later decide that you would rather wait to receive benefits, you can withdraw the application to receive benefits once in your life. You would then be able to start receiving benefits at a later date of your choosing (and with a higher payout). In this situation, you would still have to pay the government back everything you received from the benefit, including any taxes deducted or Medicare payments.
A situation like this might occur if you retire at 61, take your social security benefits, and then decide to return to work at 62. You would then want to withdraw the Social Security application within the first 12 months and pay back what you received as you return to work.
Social Security Tax Structure
The benefits you would receive from Social Security may be taxable in certain situations. This would depend on your "combined income," which summates adjusted gross income (AGI) with non-taxable interest payments and 50% of your Social Security benefit. Your Social Security benefit will be taxed if this combined total exceeds a specific limit. In this sense, it is in your best interest not to take Social Security benefits if you still receive earned income from your employer. You will take benefits when you reach full retirement age or your combined income falls under the annual limit.
The Future of Social Security
For a good reason, there is much speculation about the uncertainty of the Social Security program in the future. It is estimated that the trust has enough funding to cover everything promised until 2034, at which point scheduled benefits may need to be reduced to 78% of the original value. However, after that, the future is unclear, according to the 2021 annual report. Will the full retirement age be raised, or will cuts be made that negatively affect the wealthy? Congress will need to consider both of these options in the future.
Regardless, any uncertainty about the future concerning Social Security is another reason to begin saving as early as possible to enjoy the benefits of early retirement.
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