When planning for retirement, Social Security is generally one of the first topics that comes to mind and can be an extremely important piece to help ensure a secure retirement. The reason for this is that Social Security provides a guaranteed and inflation-adjusted stream of income that lasts for life. Also, if you are married and have the higher benefit, this amount would even last for your spouse’s life. For this reason, it forms the foundation from which many begin to build their retirement plan around.
How Social Security Works
Social Security is funded by payroll taxes, which consists of 6.2% for employees and 12.4% for the self-employed, up to annual income limits. These payroll taxes are commonly known as FICA, or Federal Insurance Contributions Act. From there, your benefit is tied to your highest 35 years of earnings and is run through a complex formula to determine your monthly benefit amount at Full Retirement Age (FRA). Based on your birth year, this typically ranges from age 66 to 67.
Should You Claim Early?
Many people decide to claim early to get back what they paid in as soon as possible. In some cases, this makes sense especially with shorter life expectancies or urgent financial needs. With that being said, claiming early permanently reduces your monthly benefit and it can significantly affect survivor benefits for your spouse if you have the larger benefit. When you claim early, as early as age 62, your benefit is permanently reduced by about 7%-8% per year. On the other hand, you can delay your benefit passed your FRA up to age 70, where it permanently increases your benefit roughly 8% per year
Key Factors to Consider When Claiming Social Security
1. Have You Worked 35 Years?
Social Security calculates your benefit using your highest 35 years of earnings. If you haven’t worked that long, zeros are averaged in which lowers your benefit. Working a few more years to replace those zeros can make a noticeable difference in your monthly benefit. Even if you have worked 35 years, one or two low-earning years can reduce your benefit. By continuing to work and earning more now, you can replace those lower years and potentially increase your Social Security benefit.
2. Are You Still Working?
Claiming benefits before your FRA while still working can result in temporary benefit reductions if your earnings exceed the limit. For 2025, these income limits are $23,400 for those under FRA and $62,160 in the year you reach FRA. After reaching FRA, you can earn as much as you want without any reduction in your benefit.
3. Your Life Expectancy
This is a tough conversation to have, but it is crucial in your decision on when to claim. If you expect a shorter lifespan, generally before age 80, early claiming might make sense. However, if you live into your 80s or 90s, delaying can result in a higher monthly payment as well as lifetime payout. No matter what the case, please remember that betting on a short life can be a costly mistake if you’re wrong.
4. Your Spouse’s Future
If your benefit is larger than your spouse’s, delaying can increase their survivor benefit. This is especially important if they are younger or expected to live longer than you. In this case, it may be more beneficial to delay your larger benefit as long as possible as this benefit is guaranteed for you and your spouse’s lifetime.
5. Tax Implications
Working or drawing from retirement accounts while collecting benefits can cause up to 85% of your Social Security to be taxable depending on your total income. For this reason, it is important to coordinate your claiming strategy with tax planning to help you keep more of your benefit.
Claiming Social Security is one of the most important financial decisions you’ll make in retirement. While the idea of claiming early can be tempting, it is important that your decision considers your health, income, taxes, and spouse’s needs to help ensure a secure retirement. If you are unsure what the right decisions is for your unique situation, we’re here to help. Contact JGUA for a free consultation at 607-936-3785 or email info@jgua.com.
