You spend your entire working life paying into Social Security, so you want to make the most of your benefits when the time comes. You might believe that your extensive portfolio and diverse income sources make these benefits insignificant, or that the complexities and uncertainties surrounding Social Security make it less relevant to you. However, this assumption can be a costly oversight.
In reality, Social Security offers a guaranteed, inflation-protected income stream that lasts a lifetime, providing an essential foundation for your retirement plan. It also offers tax-efficient income, spousal and survivor benefits, and a safety net for health care costs. By strategically maximizing your Social Security benefits, you can build more wealth, diversify your income sources and create a more resilient retirement strategy. Let’s look at how to account for Social Security benefits in your financial plan while addressing concerns about the viability of the Social Security system long term.
Increasing your Social Security benefits
Consider the following strategies to maximize your Social Security benefits:
Delayed claiming
For each year you delay claiming Social Security past your full retirement age (FRA), your benefits increase by approximately 8% until age 70.1 For example, if your FRA benefit is $2,000 per month, delaying your claim by one year would increase your monthly benefit to $2,160. Delaying for two years would boost it to $2,320, and delaying until age 70 could increase it to $2,560 per month.
According to the Social Security Administration (SSA), FRA is as follows:2
| Birth Year Range | Full Retirement Age |
|---|---|
| 1943 to 1954 | 66 |
| 1955 to 1959 | Increases gradually |
| 1960 or later | 67 |
Personal tax rates are probably going in one direction: Up.
Spousal coordination
If you’re married, coordinate with your spouse to maximize your joint benefits. Often, it’s helpful for the higher-earning spouse to delay claiming while the lower earner claims earlier. This is because increases to the higher earner’s benefits will be larger than the lower earner’s. Delaying the higher earner’s benefits can also increase the survivor benefits for the lower-earning spouse. If the higher-earning spouse passes away first, the surviving spouse can switch to the higher benefit amount.3
Tax optimization
Remember that 85% of your Social Security benefits are taxable so long as your income exceeds $34,000 (or $44,000 if married filing jointly).4 To minimize the tax hit, consider drawing from Roth accounts, which provide tax-free income, or executing Roth conversions in the years leading up to claiming benefits. Roth IRA withdrawals are tax-free in retirement, provided certain conditions are met (e.g., the account has been open for at least five years and you are over age 59 ½).5
Impact of early retirement
Early retirement reduces Social Security benefits. If you were to claim benefits at age 62, the earliest age, your monthly payment would be less than the amount you’d receive if you waited until FRA. For instance, if your FRA is 66, claiming at 62 would reduce benefits by about 25% to 30%.6 Delaying benefits until age 70 would increase payments by approximately 8% annually. Early retirement would also reduce survivor benefits. However, a special provision ensures that the widow(er)’s benefit is not less than 82.5% of the deceased worker’s primary insurance amount.7
The future of Social Security
You may have concerns about the challenges the Social Security program faces and the potential reforms on the table. According to a 2023 Gallup survey, 47% of non-retirees do not expect the Social Security system to pay them a benefit when they retire.8 While the program isn’t in immediate danger, action will be needed in the coming years to ensure its long-term viability.
Here’s what you should know:
- The latest Social Security Trustees Reports summary projects that the Old-Age and Survivors Insurance (OASI) Trust Fund, which pays retirement benefits, will be depleted by 2033. At that point, if no changes are made, the fund’s continuing income will only be sufficient to pay 79% of scheduled benefits.9
- Reforms are likely coming in the years ahead to shore up Social Security’s finances. Possibilities include increasing the payroll tax rate, raising or eliminating the cap on income subject to the tax, raising the FRA, or some combination of these measures.
- While benefit cuts can’t be ruled out entirely, they are unlikely given the program’s popularity. A more probable scenario is that taxes will go up to fund current benefit levels.
- Given the uncertainty around future reforms, it’s smart to use conservative assumptions about Social Security when planning for retirement. Don’t count on getting 100% of your currently projected benefits. This is our approach when we run Social Security scenarios for our clients as part of our financial planning process.
While Social Security faces real challenges, the program is unlikely to disappear. Modest changes, likely focused more on increasing taxes than cutting core benefits, should keep it viable for the long haul. But planning for the possibility of reduced benefits is still a good idea. Boosting your retirement savings now can help compensate for potential Social Security changes down the road.
Integrating Social Security into your retirement plan
Social Security benefits can help you calculate safe withdrawal rates. The 4% rule10 is a common guideline for determining how much you can withdraw annually from your retirement savings. However, this rule can be adjusted when you factor in Social Security benefits, which provide a guaranteed income stream.
Guaranteed income stream
Social Security payments act as a stable, inflation-adjusted source of income that reduces the pressure on your retirement portfolio. This can help preserve your investment portfolio for a longer period, reducing the risk of depleting your savings prematurely.
To illustrate, if you have a retirement portfolio of $5 million, using the 4% rule would suggest an annual withdrawal of $200,000. If you receive $50,000 annually from Social Security, you would only need to withdraw $150,000 from your portfolio to achieve a total income of $200,000. This reduces your portfolio withdrawal rate to 3%, increasing the sustainability of your retirement funds.
Supplementing income needs
With Social Security covering a portion of your essential expenses, you can preserve more of your retirement savings. This supplementary income helps you avoid dipping into your retirement accounts too heavily, especially during market downturns.Mitigating sequence of returns risk
Social Security payments can act as a buffer against the sequence of returns risk—the danger that poor market returns early in retirement could deplete your portfolio prematurely. By relying on Social Security during market downturns, you can avoid selling investments at a loss and give your portfolio time to recover.
Longevity protection
Since Social Security benefits are paid for life and adjusted for inflation, they provide a form of longevity insurance. This reduces the risk that you will outlive your retirement savings, offering peace of mind and financial security.
Talk to your advisor about maximizing your Social Security
Maximizing your Social Security benefits is a key component of a comprehensive retirement strategy. By understanding the various claiming strategies available, such as delayed claiming, spousal coordination and tax planning, you can significantly increase your lifetime benefits and secure a more comfortable retirement.
To make the most of your Social Security, consult with a knowledgeable financial advisor at our firm. We can help you tailor a claiming strategy that complements your other retirement plans, taking into account your specific financial situation and goals. Your advisor can also guide you through the complexities of Social Security regulations and help you navigate any changes in the law that may affect your benefits.
Your retirement strategy is not static. You need to review it regularly to ensure that your plan remains on track. As laws change, economic conditions fluctuate and your personal financial situation evolves, your retirement strategy may need to be updated. By working closely with your financial advisor, you can adapt your plan to meet your changing needs and maintain a secure retirement.
If you’re looking to optimize your Social Security benefits and develop a robust retirement plan, we encourage you to contact us. Our experienced professionals are dedicated to helping you make informed decisions that maximize your retirement income. Reach out to us today to schedule a consultation and take the first step toward a more confident retirement.
Think of the current estate tax breaks as a limited-time offer.
Sources:
- Lankford, K. & LeValley, D. (2024, February 23). Boost your Social Security benefit every month you delay. Kiplinger.
- Social Security Administration. (2024). Retirement benefits. [Guidebook]
- Social Security Administration. (n.d.). If you are the survivor.
- Josephson, A. (2024, May 30). Is Social Security taxable? SmartAsset.
- Internal Revenue Service. (n.d.). IRA FAQs – Distributions (withdrawals).
- Social Security Administration. (n.d.). Early or late retirement? [Calculator]
- Weaver, D. A. (2001, June). The widow(er)’s limit provision of Social Security. [ORES working paper No. 92.] Social Security Administration.
- Jones, J. (2023, December 8). Americans more upbeat about future Social Security benefits. Gallup.
- Social Security Administration. (n.d.). A summary of the 2024 annual reports.
- New York State Deferred Compensation Plan. (n.d.). What is the 4% rule of retirement income?
Disclosures:
For informational purposes only. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed. Our statements and opinions are subject to change without notice. Always consult with a professional before taking specific action. Always consult with a legal, tax or insurance professional before taking specific action.
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