Optimizing Your Social Security Strategy for a Comfortable Retirement

July 18, 2023

In this article, we will dive into the intricacies of Social Security, exploring how benefits are calculated, determining the optimal claiming age, navigating the impact of income, balancing work and benefits, and considering tax implications. By the end, you will have a better idea on how to optimize your Social Security strategy for a more comfortable retirement. 

Understanding Social Security Benefits

To effectively optimize your Social Security benefits, it's essential to understand how they are calculated. The Social Security Administration (SSA) uses a formula based on your highest 35 years of earnings to determine your primary insurance amount (PIA), which forms the basis for your monthly benefits. 

Additionally, the full retirement age (FRA) determines the age at which you can claim full benefits. The FRA varies based on your birth year and is gradually increasing. For example, if you were born in 1960 or later, your FRA is 67 years old. 

For more detailed information on how benefits are calculated and the various factors involved, visit the SSA's Retirement Planner.

Determining the Optimal Claiming Age

Deciding when to claim Social Security benefits can significantly impact your retirement income. While you can claim benefits as early as age 62, doing so will result in a permanent reduction in your monthly payments. The exact amount of the reduction depends on your birth year and is calculated based on a percentage reduction for each month before your FRA. For individuals born in 1960 or later, the reduction is approximately 30% if you claim benefits at age 62. Your reduction is permanent, and your monthly benefit will remain lower throughout your retirement.

On the other hand, delaying benefits past your FRA can lead to increased monthly payments through delayed retirement credits. For individuals born in 1943 or later, retirement benefits increase 8% per year. This means that for every year you delay claiming benefits beyond your FRA, your monthly benefit will increase by 8%. The credits continue to accumulate until you reach the maximum credit at age 70.

It's crucial to consider several factors when determining the optimal claiming age for your situation. This graph illustrates the impact of age on Social Security payments, showcasing both the reduction and increase in benefits annually:

Early vs. Delayed Social Security Benefits

Basic Considerations

The decision of when to take social security retirement benefits can be complex. You must consider your financial need, health, and goals as well as more advanced considerations like your spouse’s benefit, income, and taxes. 

1. Your Financial Need

Firstly, consider your financial needs and obligations. If you need the income to cover living expenses and have limited alternative sources, claiming early may be necessary. In this case, the best time to take social security benefits is when you need it.

However, if you have other retirement savings or part-time income that can sustain you until a later claiming age, delaying benefits may be advantageous.

2. Your Health

Secondly, evaluate your life expectancy and health considerations. If you anticipate a longer lifespan or have good health, delaying benefits can result in higher lifetime benefits. Conversely, if you have health issues or a shorter life expectancy, claiming benefits earlier may be more beneficial.

3. Your Goals

Lastly, align your claiming age with your long-term financial goals. If you plan to continue working or have other income sources, delaying benefits can allow your monthly payments to grow, providing a larger safety net during your later retirement years.

Understanding the pros and cons of claiming early, at full retirement age, or delaying benefits is essential. AARP and Investopedia offer valuable insights into the claiming age decision-making process, helping you make an informed choice as you plan for retirement. 

Advanced Considerations

1. Your Income:

Many individuals continue working while receiving Social Security benefits. However, it's essential to understand the implications of working and earning income alongside your benefits. If you claim benefits before reaching your FRA, there are earnings limits that may affect your benefit amount.

For the years leading up to your FRA, there is a limit on how much you can earn before your benefits are reduced. Once you reach your FRA, you can work and earn as much as you want without any reduction in your benefits. It's important to be aware of these limits and how they can impact your benefits. If you exceed the earnings limits, your benefits may be reduced temporarily until you reach your FRA.

If you're still working and earning income, consider delaying Social Security benefits until your FRA or beyond to avoid reductions. Alternatively, if you claim benefits early but continue working, be mindful of the earnings limits and adjust your work hours or income to stay within the allowed thresholds. The Social Security Administration's publication on how work affects your benefits provides additional guidance and examples to help you navigate this complex aspect of retirement planning.

2. Your Self-Employment Income:

If you’re a self-employed individual, your income structure may differ from traditional employees, and it's important to understand how it affects your Social Security benefits. Self-employment income impacts benefit calculations differently than wages earned as an employee. The SSA uses a specific formula to determine your earnings, taking into account both self-employment income subject to Social Security taxes and your net profit.

To minimize the reduction in benefits due to self-employment income, accurate record-keeping and reporting are crucial. Keep track of your self-employment earnings and ensure they are accurately reported on your tax returns. This will help ensure that your earnings are correctly reflected in your Social Security record, maximizing your benefits. The IRS provides guidance on reporting self-employment income and paying Social Security and Medicare taxes, ensuring compliance with regulations. 

3. Your Spouse:

Electing Social Security benefits beyond the full retirement age for the higher-earning spouse can be a smart strategy to maximize the spousal benefit for the lower-earning spouse. When the higher-earning spouse delays their benefits, their monthly payments continue to increase through delayed retirement credits. This, in turn, boosts the potential spousal benefit for the lower-earning spouse. By electing to receive benefits beyond FRA, the higher-earning spouse not only secures higher monthly payments for themselves but also enhances the financial well-being of their spouse during retirement. This strategy can help ensure more retirement income for both partners, with a stronger combined Social Security income.

Tax Considerations and Retirement Planning

Depending on your income level and filing status, a portion of your Social Security benefits may be subject to federal income taxes. To determine if your benefits are taxable, the IRS uses a formula called the combined income, which includes your adjusted gross income, tax-exempt interest, and one-half of your Social Security benefits.

It's important to factor in these potential taxes when retirement planning. By considering the impact of taxes on your benefits, you can make more accurate projections of your after-tax retirement income. Tax planning strategies such as managing your withdrawals from other retirement accounts, diversifying your income sources, and optimizing deductions and credits can help minimize the tax burden on your Social Security benefits. 

Get Professional Help

Optimizing your Social Security benefits is a vital component of retirement planning. Remember, everyone's situation is unique, so seeking professional advice tailored to your circumstances is recommended. 

At Sensible Portfolios, we provide careful planning of the complexities involved, so you can confidently navigate the Social Security landscape.  Reach out to us today and start paving the way to a more comfortable and fulfilling retirement.


Social Security Administration