Social Security Benefits

By Zeke Anders on September 14, 2021

Written By: Zeke Anders

Social Security retirement benefits are a significant piece of most retirement plans. These benefits provide a, mostly, guaranteed source of income in retirement, which is both financially and psychologically beneficial. These benefits are also complicated due to the many rules and variables involved. The goal of this post is to help clarify how benefits are calculated, what are the different strategies for claiming benefits, and what are the benefits and tradeoffs of these strategies.

To be eligible for Social Security retirement benefits, you must have worked at least 40 quarters. Your Social Security benefit amount, officially called the Primary Insurance Amount, is based on your earnings history. The Social Security Administration uses an average of your 35 highest earning years to determine your benefit. Thus, if you work more than 35 years, your lowest earning years will be replaced by higher earning years. However, if you work fewer than 35 years, there will be zeros in your earnings record for the missing years, which can greatly reduce your benefit. The actual benefit you’ll receive is a percentage of this value. Calculating this percentage is a bit complicated, if you want to learn more you can find it here.

Your full retirement age depends on when you were born, between 66 and 67 (find yours here) . If you wait until your full retirement age to claim your benefits, you’ll receive the benefit we calculated above. You can start receiving benefits as early as age 62, but if you claim your benefits before full retirement age, your benefits can be reduced up to 30%. Your benefits will be further reduced if you earn more than $18,960 (in 2021) in any year after claiming benefits before your full retirement age. On the other hand, if you wait beyond full retirement age to claim your benefits, your benefits will increase by 8% each year until age 70. For example, if your monthly benefit is $1,000 at full retirement age (67), then if you wait until age 68 your benefit will be $1,080 per month. If you wait until age 69 your benefit will be $1,160 per month (the benefit does not compound).

Deciding when to claim your benefits can be complicated with so many variables to consider. You must consider the opportunity cost of waiting against maximizing the benefits received from the program. If you are still working, it generally makes sense to wait until you retire or reach full retirement age to claim benefits to avoid the penalty on earned income. If you are planning to retire at age 62, you should consider where you will draw cash flow until you start collecting Social Security if you choose to wait. It is important for married couples to consider spousal benefits as well. Your spouse is entitled to up to 50% of your benefit while you are living if that benefit is greater than their own. Spousal benefits are also reduced if you and/or your spouse claims benefits early. However, your spouse can not claim spousal benefits until you claim yours. The key factors in formulating a claiming strategy are your opportunity cost, expected inflation (Social Security retirement benefits are adjusted annually for inflation), life expectancy, and your spouse’s life expectancy.

This is a lot of information, and unfortunately there are few blanket recommendations that apply to everyone when it comes to Social Security benefits. Each situation is different. You can create an account at SSA.gov and view an estimate of your retirement benefits. The site has several calculators to help guide you, but we have robust tools which can simulate different claiming strategies in the context of your comprehensive financial plan. We can illustrate the benefits and drawbacks of each scenario to  help you make an informed and thoughtful decision.

Zeke Anders-Planning Specialist | zanders@twickenhamadvisors.com

Disclaimer

Twickenham Advisors is a group comprised of investment professionals registered with Hightower Advisors, LLC, an SEC registered investment adviser. Some investment professionals may also be registered with Hightower Securities, LLC, member FINRA and SIPC. Advisory services are offered through Hightower Advisors, LLC. Securities are offered through Hightower Securities, LLC. All information referenced herein is from sources believed to be reliable. Twickenham Advisors and Hightower Advisors, LLC have not independently verified the accuracy or completeness of the information contained in this document. [Advisor Practice] and Hightower Advisors, LLC or any of its affiliates make no representations or warranties, express or implied, as to the accuracy or completeness of the information or for statements or errors or omissions, or results obtained from the use of this information. Twickenham Advisors and Hightower Advisors, LLC or any of its affiliates assume no liability for any action made or taken in reliance on or relating in any way to the information. This document and the materials contained herein were created for informational purposes only; the opinions expressed are solely those of the author(s), and do not represent those of Hightower Advisors, LLC or any of its affiliates. Twickenham Advisors and Hightower Advisors, LLC or any of its affiliates do not provide tax or legal advice. This material was not intended or written to be used or presented to any entity as tax or legal advice. Clients are urged to consult their tax and/or legal advisor for related questions.