Social Security: Tips to Maximize Your Retirement Benefits

Your Social Security benefits can be a major component of your retirement. You CAN’T spend through it, so your Social Security payments NEVER run out. Unlike most of your other retirement assets, it never spends down to zero. It’s always there for you!

People dismiss the importance of Social Security and subsequently make major mistakes regarding Social Security elections, timing, and decisions. According to a recent Yahoo Finance article, 96% of Americans do not get Social Security right. Let’s see if we can fix the misinformation and get Social Security right. You have paid into the system and agonized over FICA taxes for years. Now learn how to get back all you legally can.

People tend to spend way more in retirement that they plan for. When do you spend more money, during your normal work week or during a week on vacation? Surely your answer will be during a vacation. What is retirement other than a permanent vacation? Any notion that you may spend less in retirement is not usually realistic. Unfortunately, most financial planners mistakenly assume you will spend less in retirement. This is why many people blow through their retirement savings early. This is due to travel, hobbies, and indulging grandchildren, etc. In early retirement you will finally have time to indulge in previously delayed desires, resulting in spending that reduces your retirement assets. In later retirement, due to increased health care expenses, you may involuntarily wipeout your assets. But Social Security may be your safety net as it will never run out!

Other assets may have a lifetime income benefit, such as some income annuities. But the value of those fixed benefits may be diminished by inflation. With current out-of-control government spending inflation is nearly certain to increase. The current runaway government spending and tax cutting can cause double-digit inflation like we had in the 1970s and 1980s.

Social Security may become your retirement hero because of the built-in government guarantee that it will ALWAYS be there for you. It also has built-in cost of living increases (i.e., inflation protection). Therefore, if–or more likely when–runaway inflation comes charging back, Social Security may become the ONLY retirement asset you have that still has value.

I have heard many people say, “But Social Security will not be around when I need it.” This misinformed attitude may be partially caused by the Social Security administration itself that often states that the Social Security trust fund will be depleted in 2036. This has mistakenly caused many to assume that social security will end in 2036.

Social Security payments do not depend on the trust fund. In fact, since 1986, Social Security tax payments and withholdings have collected enough to completely pay for retiree payments through 2022. From 1986 until 2022 a surplus was continued to add to the trust fund. The point is that social security is paid for by CURRENT contributions to the system. After 2022 current year social security taxes and the trust fund will combine to support the Baby Boom generation through 2036.

The noise about the Social Security trust fund comes from annuity companies wishing to scare you into buying an annuity. Or politicians hoping to scare you into voting for a certain political candidate. And don’t forget those internet ads selling Gold who also wish to scare you about the longevity of Social Security. Please don’t get fooled by these sales people. There are almost no governmental programs fully supported by taxes. Social Security will be just like the other governmental programs supported partially by taxes plus additional funding from governmental borrowing. At least social security will be mostly supported by social security taxes, about 80%.

The trust fund was created in 1986 to support the future extra-large drain on the system, caused by the size of the Baby Boom generation. The strength of the system will then be supported by the size and wealth of the Millennial generation. It is true that after 2036 social security tax collections will only support about 80% of the retiree payments. However, this does not imply that social security payments will stop or be reduced to only 80%. Additional money could come from the general budget or by making small changes in the plan. These changes could include increasing FICA tax rates or increasing the Social Security starting age. Note that they did both in 1986, during the last Social Security overhaul.

Social Security is an unbreakable social contract that is widely supported. Older Americans depended on Social Security and that will someday include you. It is not going away.

To qualify for social security, you must have paid FICA taxes into the system for 10 years. Your benefit will be calculated based on the average of your highest 35 years of eligible social security earnings. These earnings are indexed for inflation. Thus, past earning years could become some of the highest years due to the indexing. Working more than 35 years does not improve your average unless that year’s earnings is high enough to replace a previous lower indexed earning year. If you work less than 35 years those years effect the average as they add as zero years in the 35-year average calculation.

Social Security only partially replaces your earnings. The replacement ratio is based on your Average Indexed Monthly Earnings, AIME. When you start taking benefits also effects your monthly benefit.

Social Security only partially replaces your earnings based on your Average Indexed Monthly Earnings, AIME over your highest 35 years. — Social Security only partially replaces your income based on a “progressive” formula

When to Start Receiving Benefits

The most important decision you can make regarding Social Security is when you begin receiving monthly payments.

Starting Social Security benefits has nothing to do with when you retire, when you turn 65 or when you reach your Full Retirement Age, FRA. It also has nothing to do with Medicare starting at age 65. You need to SEPARATE your decision about when to start Social Security benefits with these other dates.

Let’s begin understanding the rules by first establishing your Full Retirement Age. Again, this is not necessarily the day you should target for starting your benefits.

Financial Advisor and Wealth Management — Your Full Retirement Age, FRA is Based on Your Birth Year

See the chart above to determined your FRA. This FRA age is a reference age used along with your actual payment start date to determine your monthly payments. Your FRA will be between age 66 and age 67. We believe that FRA will soon extend for younger people (born before 1970) as we are all living longer. Delaying this age, like they did in the 1986 adjustment, could make the system self-funding after 2036.

Pros & cons of starting social security early or later. Breakeven analysis is insufficient. It’s protection from living longer or inflation returning — Starting Age Effects on Social Security Benefits

You can start receiving your benefits as early as age 62 and as late as age 70. Waiting can dramatically increase your monthly payments and potentially your total payments, depending on your life span.

Benefits of Delaying Starting Benefits

Your benefits REDUCE about 6.7% for every year you start taking benefits before your FRA. Note that these reductions will be PERMANENT for the remainder of your life. Depending on your FRA, starting your benefits at age 62 could permanently reduce your benefits by 25 to 30 percent.

In contrast, your benefits INCREASE 8% for every year you delay taking benefits after your FRA. Note that these increases will be PERMANENT for the remainder of your life. Delaying starting your benefits to age 70 could permanently increase your benefits by 24 to 32 percent.

If you are taking your benefits and subsequently wish for your benefits to continue growing there is a fix. It is possible to suspend your benefits and then start them again later. You may back up the clock by paying back up to a year of benefits previously paid out to you.

Social Security benefit payment example based on starting age — Payout Based on Starting Age, Assuming FRA=66 and FRA Benefit of $1,000

The bar chart shows the effect of starting early versus starting late. The chart assumes an FRA monthly benefit of only $1,000, which is actually much lower than most FRA benefits. It also assumes an FRA of age 66. On this bar chart starting at age 62 causes a monthly benefit of $750 while waiting to age 70 allows a monthly benefit of $1,320, which is 76% higher.

Delaying Benefits Can Increases Payout from 70% to 132% of FRA

Delaying Social Security Benefits increase payout dramatically an age 62 payment of $750 become a $1,320 payment if delayed until 70 — Payout Percentage Based on Starting Year and Birth Year

The table shows the more detailed effects of how your birth year and your FRA, coupled with your benefit start year affects your monthly payments. Note that your actual payments are prorated by month and not just the year as shown in these simplified estimates.

Note that the payments shown do not reflect the cost-of-living adjustments which will be ongoing whether or not you have started your benefits.

Your Longevity Estimate Effects on Starting Date

So, when considering when to start your payments, you should also consider your longevity. If you delay starting your benefits in order to receive higher monthly benefits, this action could result in lower total cumulative benefits because of missing those early years of payments.

This chart shows that the higher delayed monthly benefit quickly makes up for the missed payments caused by delaying starting. — If a couple are both 65 years old there is a 50% chance that one will live to 95 years old

How long do you need to live to break even? The table above does the math for you, assuming your FRA is age 66 and your FRA benefit is $1,000. You would need to live to age 78 in order for the larger delayed payments to make up for missing four years of payments you forgo receiving by not starting at age 62. This is your breakeven age.

Further, if you delay starting your benefits to age 70, you would need to live to 80 to break even as compared to an age 62 start, or age 82 to breakeven compared to an age 66 start.

How long should you assume, you will live? According to a February 18, 2020 article in U.S. News & World Report, life expectancy for a 65-year-old US woman, is 86.6 years and 84.1 years for a man. But despite average life expectancy, the article also recommends planning to live until at least 95-years-old.

If a married couple are both receiving social security and one dies, the larger payment continues going to the household. Thus, it is very important that the larger benefit person delays receiving social security until age 70. Starting the smaller payment earlier (before age 70) is less important.

Inflation Shortens Breakeven Analysis

The above breakeven analysis assumes zero inflation, which is not realistic. In fact, due to runaway government spending, we believe, that inflation will become a huge issue in the coming years.

Inflation has the effect of dramatically shortening the breakeven. Due to the effect of inflating the larger delayed monthly payments, you will achieve breakeven much earlier.

The effects inflation increasing Social Security payments can dramatically reduces the breakeven period — With only 6% inflation the breakeven point is shorter by 4 years. Higher inflation shortens breakeven faster.

Let’s examine the breakeven points assuming a 6% inflation. If you wait until age 66 to start your benefits you would need to only live to age 74 in order for the larger inflation enhanced delayed payments to make up for missing four years of the payments you forgo by not starting at age 62. That’s four years earlier than the non-inflated breakeven points. Your breakeven for waiting to age 70 moves to age 76 compared to starting at age 62, and 78 compared to starting at age 66, in this 6% inflation scenario.

Breakeven analyses are popular for deciding when to start your Social Security benefits. However, I believe such analyses are absolutely the incorrect way to look at this. First, I believe most people or at least one person in a married couple will likely live long beyond the breakeven age. Further, I believe you should view Social Security as insurance for living longer than expected and insurance against high inflation. For these reasons you should let your benefits grow as long as possible before starting providing a larger benefits when all your other assets are gone. A larger benefit payment, provides a larger cost-of-living increase should inflation heat up.

You should also consider if you will be continuing to earn income after you start your monthly benefits.

If you are older that your FRA, you can have unlimited earned income that will NOT affect your monthly benefits. There are no income limits at all after your FRA.

However, if you start your benefits before your FRA, earnings may reduce or even eliminate benefits. Note that earnings do not include investment gains, interest, annuity income, withdraws from IRAs or 401(k)s. Also, pension incomes (government or private) will not impact your benefits. Only EARNED income will affect your benefits.

Earnings include wages, bonuses, commissions, vacation pay, and self-employment net income reduce benefits if totalling to more than $24,360 (in 2026; adjusted each year). For amounts over that threshold, for every two dollars earned reduces your social security benefits by one dollar.

During the calendar year in which you reach your FRA but before you obtain your FRA you can earn $64,800 (in 2026) before any reduction applies. After than, for every three dollars you earned, reduces you social security benefits by one dollar.

Once again, you have a good reason to delay taking benefits because post FRA, there are no earning limits.

The Social Security administration calculates you FRA payments by averaging your highest 35 years of paying FICA taxes on earnings. The administration adjustes (or indexs) your earning for inflation. If you continue to earn past age 70, even into your 90s, if one of those years is one of your highest 35 years it could increase your benefits. So, keep making lots of money, and also get your monthly benefit checks.

Have you ever met someone who wants to pay more taxes? I am sure you think you have paid enough taxes. Your Social Security benefits have accumulated because of the FICA taxes you have been paying. Can you believe the government wants you to pay taxes on your benefits from paying those taxes? It’s outrages but it’s true.

Social Security Benefits are taxable based on your provisional income which is often much higher than your normal AGI — A couple’s Social Security payments themself are often high enough to trigger taxation

Here is the formula: add your Adjusted Gross Income (AIG), with your tax free (Muni Bond) income, then add half of your social security payments. Note that this includes all your unearned income sources. The sum is your “Provisional Income.” Then compare your provisional income and marital status with the displayed table. Up to 85% of your Social Security payments may be fully taxable at your ordinary income tax rate. That’s right, they tax you to fund your Social Security and then you may pay taxes when getting the money back, many years later.

Your spouse can receive their own social security or up to half of your benefits whichever is greater. The amount depends on your spouse starting age. However, you must already be receiving benefits. This does not reduce your benefits. Your spouse can receive your full benefits should you die, but reductions occure if taken before their FRA.

Another way to view this is, if there are two spouses receiving benefit checks, and one spouse dies, the bigger check continues.

Social Security Benefits for the Spouse and Divorced Spouse and Children and depended grand children — Family Social Security benefits are a missed opportunity for many

Your divorced and unmarried x-spouses can receive their own social security or up to half (depending on starting age) of your benefits, whichever is greater. If the divorced spouse is caring for a child under 16 or disabled child from the marriage, they can receive up to 75%. A divorced spouse taking a spousal benefit does not reduce the previous spouse’s benefits. The catch is the marriage must have lasted for 10 years. So, if you are considering divorce after 9 years, you may wish to hang on a little longer. Taking this to the extreme, a person could marry and divorced every ten years, and then decide which x-spouse’s Social Security benefits would provide the greater monthly income. Maybe one of your X-spouses became a high wage earner?

Social Security benefits for Widows or Widowers and Survivor Children are often ignored and are a missed opportunity for many — Social Security benefits for Widows or Widowers and Survivor Children

Children’s benefits are often forgotten and do not received benefits. People are having children later in life, particularly in May—December relationships. There are many couples where one older parent is already receiving benefits while a child is still in school. A child under 18, or under 19 and still in high school, or disabled before age 22 could receive an additional 50% of the parent’s FRA benefit. This applies to a biological child, adopted, stepchild or dependent grandchild. A child surviving a parent’s death can receive to up to 75% of the parents FRA payment. I bet you know someone who meets one of these conditions whose child is not receiving the social security benefits they deserve. Help them out. Spread the word!

This is an abbreviated discussion of the multiple benefits of social security. I highly recommend a more complete review of your personal individual social security situation coupled with a complete financial plan that reviews how healthy your current path to retirement is progressing. Please use the Calendly.com link below to schedule an appointment to privately review your situation. Curtis Hill and Irina Hill can provide much needed insight to your personal Social Security Situation.

Schedule your free, no-strings consultation to maximize your Social Security