June 22, 2023

Making Sense of Social Security

Social Security monthly benefits are always a hot-button topic when it comes to planning for retirement. There is not a one-size-fits-all approach to handling Social Security, and decisions made surrounding Social Security monthly benefits need to be made within the context of each person’s comprehensive financial picture.

To begin, Social Security benefits are paid monthly to eligible retired or disabled individuals, as well as the surviving spouses and children of workers who have died. For the purposes of this article, we’ll only discuss how those benefits work for retired individuals.

What age should I begin taking Social Security payments?

That is the most common question heard from clients as Social Security age approaches. In short, payments can begin as early as 62, delayed by waiting until the age of 70, or started anytime between.  The amount received monthly varies depending on the age at which you start claiming benefits. Beginning as early as possible- at 62, for example- causes the monthly payments to decline by approximately 30% when compared to starting at Full Retirement Age (around 67, depending on year of birth). Delaying benefits until age 70 results in a monthly benefit that is 24% higher than if taking at Full Retirement Age. Once 70 is reached, continuing to defer benefits does not increase the monthly benefit; it actually reduces lifetime benefits as there is no advantage to delay any longer.

Having a basic understanding of how the time at which payments begin affects the payment amount, we can get back to the original question: when should I begin payments? Unfortunately, there is not an across-the-board answer for this, and it depends on a number of factors, with the primary being life expectancy. If you began payments at 62, for example, you’d have received more money than someone who waited until Full Retirement Age (around 67, depending on birth year) to begin benefits until around age 80. After that point, the person who waited would have surpassed you in total earnings: that is the “breakeven” point.  But this breakeven strategy is just one of many variables that should be considered.

If you know the exact date on which you will pass, it would be easier to calculate the correct age to begin payments. Fortunately, that information is out of our control. The first consideration would be around life expectancy. Do you have a family history of longevity? You’d likely want to think about postponing benefits in that case, as once you pass age 80 (per the example above), you’ll be ahead of someone who claimed benefits as early as possible. If there are factors suggesting limited longevity in your family history, on the other hand, it might be beneficial begin benefits early to maximize the benefits received in an expected lifetime.

If you expect to have to dip into retirement assets early on for additional funds, it could make sense to begin taking payments earlier. In some situations, drawing from Social Security earlier to allow retirement assets to grow in a tax-advantaged manner would be a reasonable strategy for promoting long-term asset growth.

Another consideration is expected retirement income and expenses.  If Social Security is providing the basis for non-discretionary expenses it may make sense to claim when other income stops (i.e. at retirement).  If a pension or other income source is providing for these non-discretionary expenses, these other income sources may provide additional flexibility when considering Social Security.

As part of this retirement income and expense consideration, all spousal Social Security decisions should be made in a coordinated manner. Again, a comprehensive financial plan can help shed light and clarity on how each spouse’s Social Security claiming age can impact the long-term financial plan.

How is Social Security Taxed?

The ins and outs of Social Security taxation are too complicated to get into here, but for simplicity’s sake, the following guidelines can be used for Federal taxes, directly from SSA.Gov:

  • If you file a federal tax return as an "individual" and your combined income* is
  • between $25,000 and $34,000, you may have to pay income tax on up to 50 percent of your benefits.
  • more than $34,000, up to 85 percent of your benefits may be taxable.
  • If you file a joint return, and you and your spouse have a combined income* that is
  • between $32,000 and $44,000, you may have to pay income tax on up to 50 percent of your benefits.
  • more than $44,000, up to 85 percent of your benefits may be taxable.

If you are married and file a separate tax return, you probably will pay taxes on your benefits.

*Combined Income can be calculated with the following formula:

State taxation of benefits is not uniform and varies from state-to-state.

How Can Income be Managed to Better-Position Social Security?

A common misconception is that earnings in any form- whether that be wages from a job or withdrawals from a retirement account- reduce Social Security benefits. That is not entirely true, as wages from a job are the only way to reduce benefits.  However, income from other sources can have an impact on how your benefits are taxed.

Let’s first discuss how earned income impacts monthly benefits. If you are below Full Retirement Age (ages 66-67, depending on year of birth), have claimed Social Security benefits, and continue working a wage-earning job, your Social Security would be reduced by $1 for every $2 of earnings in excess of $21,240 (in 2023). In the year in which you hit Full Retirement Age the reduction is not as significant, as these benefits are reduced $1 for every $3 of earnings in excess of $56,520.

That is a full reduction in benefits, as opposed to a tax on benefits discussed above. Therefore, it makes sense for someone who plans to continue working and earning more than the income threshold to delay taking benefits for two reasons: 1) the increased monthly benefit as a result of waiting to begin payments, and 2) not reducing benefits received due to earned income.

Of note, any benefits that are reduced due to a wage-earning job prior to FRA will result in a higher monthly payout once you hit Full Retirement Age.  This is meant to make you whole for the months your benefits were reduced.

Supplementing Retirement Income

The Social Security program was not designed to be the sole income source in retirement, but rather as a safety net to ensure some level of financial stability for American citizens. In that respect, it has performed as intended, and works as a great tool for financial flexibility in conjunction with income from a diversified retirement portfolio. The best decisions on Social Security payments are made within an overall financial plan. Reach out to us with any questions and to discover if a financial plan would provide some clarity on your Social Security decision.



SSA.Gov https://www.ssa.gov/benefits/retirement/planner/taxes.html

SSA.Gov https://www.ssa.gov/people/materials/pdfs/EN-05-10230.pdf


Download the free retirement timeline checklist

A short guide to understanding what happens at different ages throughout retirement - for example:

  • Age 50 - Catch-Up Contributions for 401(k)s, employer-sponsored plans, and IRAs begin. $7,500 for 401k ($30,000 total), $1,000 for IRAs ($7,500 total)
  • Age 55 -Certain employer-sponsored retirement plans allow distributions without penalty beginning at age 55. HSA contributions are now eligible for a $1,000/year additional catch up for those over age 55.
  • And more