Maximizing Your Social Security Benefits: Strategies for Pre-Retirees

Clients often ask when they should start claiming their Social Security benefits. While Social Security payments are generally not our clients’ primary source of retirement income, they are an essential piece of the retirement income planning puzzle. Deciding when to start claiming benefits can be complex, but making the right choice is crucial to optimizing your retirement plan. In this blog, I’ll discuss different strategies to help you maximize your Social Security benefits.

Social Security: How It Works and What You Need to Know

Social Security benefits are calculated based on your average indexed monthly earnings (AIME) over your highest 35 earning years. The Social Security Administration (SSA) then applies a formula to determine your primary insurance amount (PIA), which is the benefit you will receive at your full retirement age (FRA). FRA varies depending on your birth year, but for most pre-retirees, it falls between 66 and 67.

The earliest you can claim benefits is age 62; however, doing so results in a permanent reduction in benefits. On the other hand, delaying benefits until age 70 increases the amount by approximately 8% per year, maximizing your monthly payments.

Ways to Maximize Your Social Security Benefits

1. Defer Your Benefits

As mentioned, delaying your benefits until age 70 allows them to grow significantly. If you have other retirement income sources and are in good health with a family history of longevity, delaying Social Security is often a recommended strategy.

2. Optimize Spousal Benefits

Married couples have the opportunity to optimize Social Security by coordinating benefits. The SSA allows a spouse to claim their own benefit or receive up to 50% of their spouse’s FRA benefit. Here are a few ways to maximize spousal benefits:

• Claim Spousal Benefits First: In some cases, the lower-earning spouse can claim spousal benefits while allowing their own benefit to grow.
• Delay Benefits for the Higher-Earning Spouse: By delaying the higher-earning spouse’s benefits, you create a larger survivor benefit should the lower-earning spouse outlive them.

3. Consider Family Health & Longevity

Your health and family history are important in deciding when to claim Social Security. If you have a family history of life-threatening illnesses and a shorter life expectancy, it may be beneficial to claim earlier. Conversely, if longevity runs in your family, delaying benefits can provide greater long-term financial security.

4. Leverage Tax Strategies

Many clients overlook tax strategies in deciding when to take Social Security. Delaying benefits can provide opportunities to:

• Stay in a lower tax bracket and process Roth conversions before required minimum distributions (RMDs) begin.
• Reduce taxable Social Security income, as up to 85% of benefits can be taxed based on your total income.
• Lower Medicare premium surcharges (IRMAA) by keeping taxable income lower.

5. Coordinate Social Security with Your Overall Retirement Plan

A financial professional can help create an efficient withdrawal strategy that considers your different retirement income sources, such as IRAs, 401(k)s, pensions, and taxable investment accounts. The goal is to maximize your benefits while minimizing taxes and market risks.

6. Understand Survivor and Disability Benefits

Social Security also offers survivor and disability benefits, which are important to incorporate into your planning:

• Survivor Benefits: A surviving spouse can claim up to 100% of the deceased spouse’s benefits at full retirement age, making it essential to optimize Social Security decisions as a couple.
• Disability Benefits (SSDI): If unforeseen circumstances prevent you from working before full retirement age, Social Security Disability Insurance (SSDI) can provide early benefits.

Common Mistakes to Avoid

• Claiming Too Early: Many retirees claim benefits too soon without fully considering the long-term impact. Carefully evaluate all factors before deciding.
• Overlooking Tax Implications: Understanding how different claiming ages affect your tax situation can save you money in retirement.
• Ignoring Your Earnings Record: Mistakes in your Social Security earnings record could reduce your benefits. Review your Social Security statement annually for accuracy.
• Not Maximizing Spousal and Survivor Benefits: Spousal and survivor benefits can significantly impact retirement income. Ensure you understand the rules to maximize what you’re entitled to.

Final Thoughts

To get the most out of your Social Security benefits, you’ll want a solid understanding of your options and how they fit into your overall financial plan. At BGM, we help clients develop strategies tailored to their retirement goals. If you have any questions or need guidance, feel free to reach out for personalized financial planning assistance. Creating a comprehensive retirement strategy is key to a secure and successful future.

The opinion of the author is subject to change without notice and must be considered in conjunction with relevant regulation, as well as subsequent changes in the marketplace. Any information from outside resources has been deemed to be reliable but has not necessarily been verified. Each individual has unique circumstances to which this information may or may not be relevant. Under no circumstances will this information constitute an offer to buy or sell and it does not indicate strategy suitability for any particular investor.