How to Optimize Your Social Security Benefits

One of the most important decisions you can make when planning for retirement is when to start taking your Social Security benefits.  Done right, you can increase the amount of money available to you in retirement, decrease the likelihood of running out of money, and eventually optimize Social Security. 

Of course, this discussion assumes Social Security benefits will be available when you need them.

Social Security is resilient

Doubts about the viability of Social Security have persisted for many years.  

A Gallup poll conducted in December 1989 showed that 47% believed Social Security would not be able to pay them a benefit when they retire.  That percentage increased to 51% in July–August 2015.

A resounding vote of confidence!

In the short term, it appears Social Security System will be able to continue to pay benefits.

According to the Center on Budget and Policy Priorities, the 2022 report from the Trustees for the Social Security trust funds shows that the system can pay “full benefits” for 13 more years but faces a “significant, though manageable” funding shortfall.

Electing Social Security: Early or late?

You can elect to take your Social Security benefits as early as age 62 and as late as 70.

The Social Security Administration calculates your basic benefit (or the amount you would receive at your full retirement age) based on your lifetime earnings.  Your full retirement age varies based on the year you were born.  You can use this calculator to determine your full retirement age. 

The actual amount you will receive each month depends on when you elect to start receiving benefits.  As a general rule, the longer you delay initiating your benefit, the higher it will be.  The difference in benefits between those who take them early or late is striking.  

The Social Security Administration provides this example.  It assumes a benefit of $1,000 at a full retirement age of 67.  The monthly is $700 if you elect to start taking it at age 62.  It increases to $1,240 if you defer taking it until age 70.  The benefit at age 70 is about 77% more than the benefit at age 62.

You can roughly calculate the benefits you will receive at every age using this calculator on the Social Security Administration website.  

Your initial monthly payment sets the base for the benefits you’ll receive for the balance of your life.  Annual cost-of-living adjustments are based on your initial payment.  

It may also impact benefit protection for your survivors since the amount of those benefits (payable to widows, widowers, and certain dependents) is based on the benefits paid to the deceased employee.

This disparity does not seem to impact many Americans who still choose early benefits.  According to Experian (based on a survey taken by Gallup in 2021), about one-third of eligible people (31% of men and 34% of women) claimed Social Security at age 62. 

Issues to consider in taking Social Security benefits 

The decision of when to start taking Social Security benefits is complicated.  It involves an assessment of your current cash flow, health status, marital status, family longevity, other sources of retirement income, whether you plan to work in retirement, and your future financial needs and obligations.

There isn’t a “one-size-fits-all” answer.

Medical bills: Taking Social Security early can be a wise decision—notwithstanding the reduction in benefits—for those concerned about covering medical bills.  You may be particularly vulnerable in the gap years between the earliest you can take Social Security benefits (age 62) and age 65 when you become eligible for Medicare benefits.

Debt: If you have significant debt, especially high-interest credit card debt, it may be prudent to receive Social Security benefits early and reduce that debt.

Life expectancy: Your life expectancy is another variable.  You can use this calculator provided by the Social Security Administration to compute your life expectancy.  

Here’s an important caveat:  The life expectancy calculator shows you an average of additional years you can expect to live, and it’s based only on your sex and date of birth.

If you know you will live a long life, delaying your Social Security benefits makes sense.  If you are in poor health, an early election might be your best choice.

Marital and employment status:  The amount of your benefits (and your options) vary depending on whether you are married, divorced, widowed, or employed.

The decision of when to start taking Social Security benefits and building a Social Security strategy is multi-faceted.  It may be wise to consult with a low-cost financial advisor or Certified Public Accountant.

You might also want to consider using software that runs calculations and determines the best Social Security strategy to increase your lifetime benefits. 

Darrell Armuth founded Sensible in 1994. Since then, he has served hundreds of clients. Darrell is a Certified Public Accountant certified by the state of Nevada.