Pick a Winning Social Security Strategy

For someone who earns a medium income and starts benefits at full retirement age, Social Security replaces about 40% of preretirement average lifetime wages; it replaces about 27% for high earners. For those filing for benefits in 2020, the maximum monthly check is $3,011 for high earners who claim at full retirement age or $3,790 for those claiming at age 70.

Even if Social Security is not a big slice of your retirement income portfolio, it’s a valuable component. You get an annual cost-of-living adjustment, and benefits are backed by the U.S. government. Think of Social Security as “an inflation-adjusted lifetime income annuity,” says Jay Abolofia, a certified financial planner in Weston, Mass. “It’s a guaranteed source of income that keeps up with inflation and pays you and your surviving spouse until you die.”

And in today’s economic environment, Social Security carries more weight. With interest rates hitting bottom, yields on conservative investments such as bonds and certificates of deposit are paltry. Plus, “recessions often cause companies to cut or eliminate the dividends they pay to shareholders. Both of those effects can reduce the amount of income retirees receive from their investment portfolios,” says Brian Littlejohn, a CFP in Glenwood Springs, Colo.

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The latest projections from Social Security’s Board of Trustees estimate that the total cost of Social Security’s programs will exceed income starting in 2021, and reserves for the fund that pays out retiree and survivor benefits will run out of money by 2034. At that point, payroll taxes would cover 76% of scheduled benefits. What’s more, with record job losses resulting from the pandemic, decreases in payroll tax revenues could accelerate the fund’s depletion.

Eventually, lawmakers will almost certainly bolster the program by taking such measures as raising the tax rate on wages (currently, a total of 12.4% for employers and employees), boosting the amount of wages subject to tax (currently, the cap is $137,700) or increasing the age of full retirement, although future benefits may still be reduced to some degree. And if you are already retired or getting close to it, you probably don’t have to worry about benefit cuts. Historically, adjustments to the program have mostly affected future generations, and politicians know that trimming benefits for constituents who will soon count on them would be unpopular. When forming a plan for clients, Theodore Sarenski, a CFP and wealth manager for Capital One, assumes that those who will be 62 or older by 2030 won’t face a reduction in benefits.

Plot your strategy. The million-dollar question is at what age you should start taking benefits. If you claim at 62—the earliest age possible—you’ll receive up to 30% less in your checks than if you wait until your full retirement age, which is 66 for those born between 1943 and 1954 and gradually rises to 67 for those born in 1960 or later. For each year you postpone taking benefits past full retirement age up to 70, you get an 8% boost in delayed retirement credits. Claiming at 70 is often the best move if you can afford to wait and expect to live until at least about age 80.

Postponing benefits may also help keep you in a lower income-tax bracket during the early years of your retirement. While you’re in a lower bracket, it may make sense to convert a traditional IRA to a Roth, for example, paying a reduced tax rate now and enjoying tax-free withdrawals later.

For married couples, it’s wise for the higher-earning spouse to claim benefits at 70, if possible. That’s because when one spouse dies, the surviving spouse receives 100% of the highest benefit.

“This will increase the guaranteed stream of income that lasts not just for the higher earner’s lifetime, but also the spouse’s lifetime. It’s a way to create longevity insurance,” says Greg Will, a CFP in Frederick, Md. It may be worthwhile for the lower-earning spouse to claim his or her own benefits as early as 62 to gain some income in the meantime.

Spouses should keep some other things in mind, too. You can claim spousal benefits on your husband or wife’s record—even if you are not entitled to benefits from your own earnings—as long your spouse has started his or her benefits. If you wait until your full retirement age to claim spousal benefits, you get 50% of your spouse’s primary insurance amount—the benefit your spouse is entitled to at his or her full retirement age. A lower-earning spouse may choose to start his or her own benefits as early as 62, then switch to the spousal benefit once the spouse starts claiming benefits, if claiming the spousal benefit will produce a larger check.

If you have started to claim benefits and decide to go back to work before you reach full retirement age, don’t forget about the earnings test. If you earn more than $18,240 from employment in 2020, your benefits will be reduced by $1 for every $2 you earn above that threshold. The year you reach full retirement age, the exemption is higher—in 2020, it’s $48,600—and Social Security withholds $1 for every $3 you earn, but only in the months prior to the month of your birthday. Once you hit full retirement age, Social Security boosts your monthly check to make up for the benefits you lost to the earnings test.

For more on claiming strategies and other details related to Social Security, see Your Social Security Questions Answered. To get help figuring out the best plan for you, consult a financial planner or use software such as Social Security Solutions (starting at $20 for a personalized report) or Maximize My Social Security ($40 per year).