As you approach retirement, Social Security is likely one of the cornerstones of your financial plan. While many understand that it will provide a steady income stream, the specifics of how Social Security works, when to claim it for maximum benefits, and how to integrate it into a broader retirement plan can be complex. Let’s break it down to help you make more informed decisions before you retire.

How Does Social Security Work?

Social Security is a government program designed to provide financial support to retired workers, individuals with disabilities, and their dependents. Throughout your career, a portion of your earnings is paid into the Social Security system through payroll taxes under the Federal Insurance Contributions Act (FICA). These contributions are held in a trust fund, and when you retire, you are entitled to receive monthly benefits based on your earnings record.

Your Social Security benefits are calculated using your highest thirty-five years of earnings. If you haven’t worked for a full thirty-five years, zeros will be averaged into your calculation. This highlights the importance of maintaining a steady income throughout your working life.

When Should You Claim Social Security for Maximum Benefits?

One of the most critical decisions regarding Social Security is determining the optimal age to start claiming benefits. The age at which you choose to claim benefits will directly affect the amount you receive each month.

• Full Retirement Age (FRA): The Social Security Administration sets a specific age known as your Full Retirement Age, which depends on your birth year. For those born between 1943 and 1954, FRA is 66. It gradually increases to 67 for those born in 1960 or later. Claiming at FRA ensures you receive 100 percent of your entitled benefits.
• Early Claiming (as early as age 62): You can claim Social Security as early as age 62, but your benefits will be reduced permanently by about 25 to 30 percent. For someone whose FRA is 67, claiming at 62 reduces monthly benefits by 30 percent. This may be an attractive option if you need income earlier or have health concerns, but it’s crucial to understand the long-term impact of reduced benefits over your lifetime.
• Delayed Claiming (up to age 70): For each year you delay claiming past your FRA, your benefit increases by about 8 percent per year until age 70. For instance, if your FRA is 66 and you delay until 70, you could receive 132 percent of your monthly benefit. If longevity runs in your family, delaying benefits can significantly boost your retirement income.

How Can You Maximize Your Social Security Strategy?

To maximize your Social Security benefits and integrate them effectively into your retirement plan, it’s essential to evaluate your financial situation holistically. Here are a few strategies to consider:

• Work longer: By working beyond your FRA, you not only increase your Social Security benefits but may also have the opportunity to save more in retirement accounts and reduce your withdrawals in the early years of retirement.
• Coordinate with other income sources: Draw on other assets strategically to delay claiming Social Security, thereby increasing your benefit. This can be particularly useful if your investments are performing well and you have enough liquidity to meet your living expenses.
• Factor in life expectancy: If you expect to live longer than average, delaying Social Security might be beneficial. If your health is a concern or you anticipate a shorter lifespan, claiming earlier may make more sense.

Social Security is a critical part of retirement income planning, but it should be viewed as one piece of a larger puzzle. Deciding when to claim, understanding its impact on your overall finances, and integrating it with your retirement savings, taxes, and healthcare needs will help ensure that you make the most of your benefits. Before making any decisions, contact Mark Vergenes for help developing a Social Security strategy that fits your personal circumstances and broader retirement goals.