Clients frequently ask me about the best time to start taking Social Security benefits, with the hope that there's a golden rule or simple answer.
As with so many areas of financial planning, we need detailed facts on a client's financial situation to make the call. Now that the One Big Beautiful Bill (OBBB) is law, even more questions on this topic arise.
Impact of OBBB on Social Security
The new law temporarily adds an extra deduction of $6,000 for each qualifying individual age 65 and older for both itemizers and non-itemizers.
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It phases out when MAGI (modified adjusted gross income) exceeds $75,000 for single filers and $150,000 for married couples filing jointly.
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As with so many other areas of financial planning, determining the best time to claim Social Security benefits depends on a client's financial situation.
Since the law was signed, we're revisiting financial plans with my retired 65-and-older clients who have already claimed their Social Security benefits or are planning to claim between this year and 2028 to see where their current income is relative to the phase-out range.
If they are at risk of being phased out of the deduction, we look at lowering their taxable sources of income by, for example, leaning on taxable investment accounts rather than tax-deferred accounts.
Some clients are also rethinking Roth conversions in the short term to avoid raising their income above the phase-out threshold. However, you should weigh the short-term benefits vs the long-term impact.
For example, a recent couple were both planning on retiring and claiming their Social Security benefits at their full retirement age of 67 in 2027.
However, given their other fixed income sources, their MAGI would then exceed the phase-out threshold.
One solution is for the wife to claim benefits, while the husband delays claiming until a later year when he would receive a higher benefit.
They would then withdraw from after-tax investment accounts through 2028 for the nominal amount of supplemental income they need in the short term.
Social Security benefits schedule
There's a sliding scale on the amount of Social Security benefits for Americans, starting with a discounted monthly rate you can take at age 62. The payment gradually increases each year if you wait to claim benefits until your full retirement age (FRA).
The FRA year is based on your birth year.
For instance, if you were born from 1955 to 1959, the full benefits are realized at age 66 plus two months each year. So, if you were born in 1955, your FRA is 66 years and two months; if you were born in 1959, it's 66 years and 10 months.
Your benefits continue to increase at a premium (8% a year) if you wait to claim them when you reach age 70.
If you haven't already, go to the Social Security Administration website to create your own account and review your benefit schedule for accuracy before you apply for Social Security benefits.
If you're pushed into early retirement
Most workers expect to retire at age 65 or older, but less than a third do so due to health issues, job termination and/or demands to care for others.
When one or more of these factors require someone to retire earlier than expected, we need to look at the bigger picture to determine the timing on when to file.
For instance, if genetics lean toward many family members passing in their 70s or earlier, there's a compelling reason to take benefits earlier rather than waiting to start at 70 for the maximum benefit.
If, however, there's good health and a family history of longevity, even if for just one spouse within a couple, it's a good idea to look at other resources to initially fund retirement and perhaps let the lower-income-earning spouse take benefits earlier, while the higher-income earner holds off until 67 or later.
This strategy helps preserve the maximum benefit for the surviving spouse.
The table comparison below illustrates the projected benefits for a couple of the same age, both born after 1960, so their FRA is 67. The higher-income earner has a monthly benefit at 67 of $3,542, and the lower-income earner's benefit at 67 is $3,036.
The tables reflect their annual benefits several years after claiming benefits from the years 2040 through 2050, with the higher-income-earning spouse passing away at 77.
Note that there is an annual inflationary rate assumption of 2.5%. If the lower-income-earning spouse delays claiming benefits, the annual combined benefit for the years both spouses are living is increased.
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If one of them passes, the surviving spouse receives income that's adjusted through survivor benefits to equate to what the higher-income earner would have received if they continued to live.
Timing is everything
As they close in on that two-to-five-year window of their retirement date, we advise clients to work with their financial and legal team to assess all assets and income sources for retirement.
Those considering retirement in the near term who have not claimed Social Security benefits should look closely at taxable income. MAGI is calculated by adding the full Social Security benefit amount.
For some, a delay in claiming benefits for the higher-income earner could make the difference in whether the benefit claimed by the other spouse is phased out of receiving the extra $6,000 deduction.
Now more than ever, retirees should apply tax-planning strategies and a holistic view of their overall financial situation in deciding which assets should be drawn upon for retirement income.
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