The decision of when and how to claim Social Security benefits can significantly impact your financial future. 

Here are key factors and actionable steps to help you optimize your Social Security claiming strategy.

The importance of timing your Social Security claim

The timing of your Social Security claim plays a crucial role in determining the amount of monthly benefits you will receive. 

When you reach your full retirement age (FRA), you have the option to claim your benefits. However, if you delay your claim beyond this age, you will see significant financial advantages. 

FRA is 66 years and two months for people born in 1955, and it gradually rises to 67 for those born in 1960 or later

The benefits you receive increase by 8% for each year you postpone claiming until you turn 70. This means that if you can afford to wait, delaying your claim can lead to a substantially higher monthly income in retirement.

If you decide to claim your benefits early, starting as young as 62, this can lead to a considerable reduction in your monthly payments. The reduction can be as much as 30% or more, depending on how early you claim. Claiming benefits too early can have long-lasting impacts on your financial security later in life, especially if you live into your 80s or 90s.

It's essential to carefully consider your personal circumstances, including your health, financial needs, and other retirement income sources, when deciding when to claim Social Security. A well-timed claim maximizes your potential benefits and can provide significant long-term financial stability, helping to ensure that you have adequate resources to support yourself throughout retirement.

How does life expectancy influence your decision?

Your life expectancy plays a pivotal role in determining when to claim benefits. If you expect a longer life, delaying benefits often results in higher cumulative payouts. For those with health concerns or a shorter life expectancy, claiming earlier may be beneficial.

The break-even point for delaying benefits is typically around age 78. Beyond this point, delayed benefits generally result in higher total payouts.

The role of spousal benefits 

Social Security provides spousal benefits that can maximize a household’s total income. A spouse can claim up to 50% of the higher earner’s benefit if they delay claiming until their FRA. This strategy becomes even more advantageous when one spouse has significantly higher lifetime earnings.

Survivor benefits—based on the higher earner’s benefit—highlight the importance of delaying claims. The surviving spouse can secure a larger monthly income by ensuring the higher earner delays benefits until 70.

What is the impact of working while claiming Social Security?

Your earnings can reduce your Social Security payments if you claim benefits before reaching FRA and continue working. For 2024, every $2 earned above $21,240 results in a $1 reduction in benefits until FRA. Once FRA is reached, there are no reductions, regardless of income. 

It’s important to consider these potential reductions when planning your claim strategy.

Tax considerations

Social Security benefits can be subject to federal income tax based on your combined income. If your combined income exceeds $25,000 for individuals or $32,000 for married couples filing jointly, up to 85% of your benefits may be taxable. 

By coordinating withdrawals from tax-advantaged accounts such as IRAs or Roth IRAs, you can lower your taxable income and reduce the tax burden on Social Security benefits.

What about future uncertainties in Social Security?

According to the Social Security Administration, the trust fund reserves may be depleted by 2034, potentially resulting in reduced benefits. While these projections warrant attention, drastic changes are only possible with legislative action.

It’s prudent to balance these uncertainties with your financial situation. Having diverse income streams, such as pensions or investments, can reduce reliance on Social Security and provide a safety net against future benefit reductions.

Summary of strategies to optimize Social Security benefits

• Delay claims when possible: Waiting until age 70 maximizes monthly benefits and provides higher cumulative payouts if you live past the break-even age.
• Coordinate spousal claims: Plan claims strategically to leverage spousal and survivor benefits, primarily when earnings differ significantly between spouses.
• Evaluate health and longevity factors: Use realistic life expectancy assumptions to determine the optimal claiming age for your situation.
• Plan around employment income: If claiming before FRA, avoid reductions by considering the impact of earned income on benefits.
• Incorporate tax-efficient withdrawals: Minimize combined income to reduce taxation on Social Security by managing withdrawals from taxable accounts.

Final thoughts

Optimizing your Social Security claiming strategy requires careful consideration of various factors, including timing, life expectancy, spousal benefits, tax implications, and future uncertainties. By taking a proactive approach and consulting with a financial advisor, you can make informed decisions to secure a comfortable retirement.

Disclaimer: Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through TOP Private Wealth, a registered investment advisor and separate entity from LPL Financial.