Throughout your career, you’ve contributed to Social Security, probably without giving it a second thought. It’s something every working American pays into, but very few understand. And when it comes time to claim your benefits, you’re faced with some daunting decisions. How much are you eligible for? Will you get a higher benefit if you wait? How is it taxed?
At Legacy Wealth Advisors, we help pre-retirees like you navigate these decisions and integrate Social Security into your plan. This guide explores some key considerations for maximizing your Social Security benefits while addressing timing, options for spouses and family members, and tax implications.
Understanding Social Security Basics
Social Security provides a nice supplement to your retirement income, and can open up more opportunities to enjoy your retirement and leave a stronger legacy. However, you’ll have a lot of decisions to make when it comes time to claim benefits. Here are some basics of Social Security benefits that you should know.
What Are Social Security Benefits?
- Eligibility: You must have worked at least 10 years to qualify.
- Benefit Calculation: Benefits are based on your highest-earning 35 years and is adjusted for inflation.
- Income Replacement: Social Security aims to replace about 40% of pre-retirement income for average earners. Higher income earners should not expect Social Security benefits to replace as much.
While this is a dependable source of income, it’s not sufficient to cover all your retirement expenses. That’s why integrating Social Security into a broader financial strategy is essential.
Also keep in mind that these are just the basics. You will want to work with your financial advisor to get a deeper understanding of your benefits based on how long you’ve worked, how much you made, whether your spouse has worked, and whether you can claim disability or additional benefits.
How is Social Security Calculated?
The Social Security Administration (SSA) calculates your benefits using a formula based on your highest-earning 35 years of employment. You can check your eligibility and get a general benefits estimate on the SSA’s website. You will need to login using your Social Security number.
When to Take Social Security Benefits
This is a common question we get at Legacy Wealth Advisors, and our answer is always the same—it depends. Social Security benefits are based on your full retirement age, which is when you can claim maximum benefits. Full retirement age (FRA) depends on what year you were born. Regardless of your FRA, here are some key ages to be aware of:
- Age 62: You can begin taking benefits as soon as age 62, but since this is before FRA, your payments are reduced by up to 30%.
- Full Retirement Age (FRA): Depending on your birth year, FRA is typically age 66-67, when you receive your full benefit amount.
- Age 70: Some individuals delay claiming benefits until age 70. Waiting to claim until age 70 increases payments by about 8% annually. After age 70, you won’t get any additional benefit by delaying.
Pros and Cons of Early vs. Delayed Benefits
Some pre-retirees can gain from taking early Social Security, while for others it’s wiser to wait. It depends on your current financial situation and your goals for retirement. Here are some pros and cons of taking early vs. delayed benefits.
Taking Benefits Early (Age 62):
- Pros:
- Provides immediate income for those retiring early or facing financial needs.
- Allows for a longer period of payments over your lifetime.
- Cons:
- Reduces monthly benefits permanently.
- May not be ideal for those with longer life expectancies.
Delaying Benefits (Up to Age 70):
- Pros:
- Increases monthly benefits, providing a greater safety net later in life.
- Beneficial for individuals in good health with other income sources.
- Cons:
- Requires relying on other savings during the delay period.
Legacy Wealth Advisors’ Approach
We take a personalized approach to evaluate your circumstances. Whether it’s understanding your life expectancy, assessing your financial health, or balancing immediate and future needs, we help you determine the best timing to maximize benefits.
Using Spousal and Family Benefits
For many, Social Security also includes spousal and family benefits. These can be helpful if your spouse did not work outside of the home or had a lower-earning job. For married couples and families, understanding and coordinating these benefits can help you plan for your retirement goals more effectively.
Spousal Benefits
- If you are married, you might qualify for benefits based on your spouse’s work record.
- Spousal benefits can be as much as 50% of your spouse’s full retirement benefit.
- You can claim these benefits even if you haven’t worked or did not work long enough to be eligible.
- You can still receive these benefits after your spouse passes away or if you were to get divorced, but the amount may decrease.
Coordinating Benefits for Married Couples
Beyond spousal benefits offered by the SSA, you may want to consider coordinating benefits with your spouse. Here are a few examples of how that might look:
- One spouse can claim early, providing income while the other delays benefits to maximize payments.
- Coordinating claiming ages can increase lifetime benefits, especially for households with different earning histories.
Survivor Benefits
Survivor benefits are Social Security benefits that your dependents, spouse, and beneficiaries can claim after you pass. Children under certain conditions may qualify for these benefits, as do widows. The rate depends on factors like the deceased’s income and how long they were married.
How Legacy Wealth Advisors Can Help
At Legacy Wealth, we specialize in helping couples and families make the most of their options as a spouse. By understanding your family’s dynamics and financial goals, we ensure your Social Security strategy supports a secure future for all involved.
Tax Implications of Social Security
Social Security is considered taxable income. For many pre-retirees, this is an important consideration in financial planning, especially when examining their income in retirement and how their taxes may change in their spending years.
How Social Security Is Taxed
Your tax liability is determined by your combined income, which includes:
- Adjusted Gross Income (AGI)
- Nontaxable interest
- Half of your Social Security benefits
Depending on your total combined income:
- Up to 50% of your Social Security benefits may be taxable if income exceeds $25,000 (individual) or $32,000 (married filing jointly).
- Up to 85% may be taxable if income exceeds $34,000 (individual) or $44,000 (married filing jointly).
Legacy Wealth Advisors integrates these strategies into a tax-efficient retirement plan so you keep more of your hard-earned income.
Frequently Asked Questions About Social Security
Below are some common questions we get in our office. If you need more guidance, reach out to your financial advisor or schedule a call with our team.
When Should I Start Taking Social Security?
This depends on your health, income needs, and other retirement resources. A longer delay means higher monthly payments, but starting early provides more years of income. For example, we have clients who take benefits early because they have high medical bills due to health issues. Others choose to delay until age 70 because they plan to travel more in retirement and want more money in their budget.
How Can I Maximize My Social Security Benefits?
There are a few ways you can maximize Social Security benefits. However, we would recommend talking to your financial advisor before trying anything on your own. They may have more insight into how Social Security works and could find more opportunities for you. Here are a few strategies for maximizing Social Security benefits:
- Work longer—the more years you work and potentially earn more annually, the more high-earning years you’ll have in your Social Security benefit calculations. This can be a difficult strategy to employ if you are close to retirement.
- Delay benefits if possible, especially for the higher-earning spouse.
- Coordinate spousal strategies to boost overall household income.
- Consult a financial advisor to align Social Security with your broader retirement goals, including tax minimization and even generosity planning.
How Do I Coordinate Social Security with Medicare?
Medicare typically begins at age 65, regardless of when you claim Social Security. If you are on Social Security before age 65, you’ll be automatically enrolled in Medicare Parts A and B. You can even opt for Medicare premiums to be deducted from your monthly Social Security check.
What Tax Strategies Should I Consider?
85% of your Social Security benefits are considered taxable income, so your benefits do play into your tax strategy. Your financial advisor can help you consider tax strategies like charitable giving or planning your withdrawals so you retain more of your Social Security benefits.
Why Social Security Requires a Holistic Approach
Social Security is more than a monthly benefit—it can be a key component of your retirement strategy. As your income grows more complex with pensions, investments, and other assets, a coordinated approach becomes vital to creating a clear strategy.
Key Reasons to Take a Holistic View:
- Tax Efficiency: Integrating Social Security with other income sources helps minimize taxes through charitable giving strategies.
- Legacy Planning: Your Social Security benefits can become a key piece of your estate plan, including who will receive your benefits when you are gone.
- Philanthropy: Social Security offers you extra income that you can use to give to charities or bless your family now.
Plan Ahead with Legacy Wealth Advisors
Making the most of Social Security requires careful planning, but you don’t have to navigate it alone. At Legacy Wealth Advisors, we take pride in being a trusted guide, simplifying complex decisions to empower you with confidence.
Ready to take the next step? Contact us today for a consultation. Together, we’ll ensure Social Security supports your retirement vision while securing your financial independence and lasting legacy.
Any opinions are those of the author and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. The information contained in this report does not purport to be a complete description of the content referred to in this material. The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making a decision, and it does not constitute a recommendation.
Material prepared by Hughes Integrated, an independent third-party.
