Social Security Strategy: Key Factors to Consider Before Claiming

Deciding when to claim Social Security benefits is one of the most important financial choices retirees face. The decision impacts monthly payments, total lifetime benefits, and tax obligations. A well-planned strategy can ensure long-term financial stability.

Several key factors influence this choice, including spousal and survivor benefits and potential taxes. Understanding these elements before filing helps maximize benefits and avoid costly mistakes.

Choosing the Right Age to File

The age at which Social Security benefits are claimed affects the monthly payment amount. Filing at 62 results in a reduced benefit, while waiting until full retirement age (FRA) or beyond increases payments. FRA depends on birth year, with those born in 1960 or later reaching it at 67. Claiming before FRA leads to a permanent reduction—benefits decrease by about 6.67% per year for the first three years before FRA and 5% for each additional year.

Delaying beyond FRA increases benefits through delayed retirement credits, which add 8% per year until age 70. Someone with an FRA of 67 who waits until 70 could see a 24% boost in monthly payments. This strategy benefits those with longer life expectancies or sufficient savings to cover early retirement years. However, those with health concerns or financial constraints may find early filing more practical.

Social Security benefits receive annual cost-of-living adjustments (COLAs) based on inflation. While COLAs help maintain purchasing power, they may not fully reflect retirees’ expenses, particularly healthcare costs. Those who delay benefits receive a higher base amount and larger COLA increases in absolute dollar terms.

Coordinating Spousal Benefits

Married couples can optimize Social Security benefits by carefully timing their claims. One option is the spousal benefit, which allows an individual to receive up to 50% of their spouse’s FRA benefit. This is useful when one spouse has significantly lower lifetime earnings, as it increases household income without reducing the higher-earning spouse’s own benefit. Filing before FRA results in a reduced amount, while waiting until FRA ensures the maximum spousal benefit.

A common strategy involves the higher-earning spouse delaying their claim to maximize their benefit while the lower-earning spouse claims either their own reduced benefit or a spousal benefit earlier. This approach provides some income while increasing total lifetime benefits. However, spousal benefits do not grow beyond FRA, unlike personal benefits, which continue increasing until age 70.

For couples where both spouses qualify for their own benefits, comparing individual and spousal benefits is important. If one spouse’s own benefit is lower than the spousal benefit, they can switch to the higher amount once their partner files. However, spousal benefits cannot be claimed until the higher-earning spouse has filed, which influences timing decisions.

Working While Receiving Payments

Earning income while collecting Social Security can reduce benefits depending on age and total earnings. The Social Security Administration (SSA) enforces an earnings test for those who claim before FRA. In 2024, individuals under FRA for the entire year will see $1 deducted from benefits for every $2 earned above $22,320. If reaching FRA in 2024, the threshold increases to $59,520, with $1 withheld for every $3 earned above that amount. Once FRA is reached, the earnings test no longer applies, and benefits are recalculated.

Continued employment can also increase future Social Security payments. Benefits are based on the highest 35 years of earnings, adjusted for inflation. If current wages exceed those from earlier years, Social Security automatically recalculates the benefit amount, potentially leading to an increase. This is particularly beneficial for individuals who had years with low or no earnings, as replacing those years with higher wages results in a larger monthly payment.

Taxes also affect Social Security benefits. If combined income—adjusted gross income, tax-exempt interest, and 50% of Social Security benefits—exceeds $25,000 for individuals ($32,000 for married couples filing jointly), up to 50% of benefits may be taxable. For those exceeding $34,000 ($44,000 for couples), up to 85% of benefits could be taxed. These thresholds have remained unchanged for decades, meaning more retirees are affected over time. Managing withdrawals from tax-advantaged accounts, such as Roth IRAs, can help reduce taxable income.

Survivor Benefit Options

When a spouse passes away, Social Security provides financial support to the surviving partner through survivor benefits. The amount received depends on the deceased spouse’s earnings record, the age at which benefits were claimed, and whether the survivor has their own work history. If the deceased had already begun collecting benefits, the survivor’s amount is based on what the deceased was receiving at the time of death. If the deceased had not yet claimed, the survivor may receive an amount based on what the deceased was eligible for, including any delayed retirement credits.

A widow or widower can claim survivor benefits as early as age 60 (50 if disabled), but doing so results in a reduced amount—typically between 71.5% and 99% of the deceased spouse’s benefit, depending on when the survivor files. Waiting until FRA ensures the maximum benefit. If the survivor has their own work record, they can claim survivor benefits first and later switch to their own, allowing their personal benefit to grow if delaying past FRA.

Divorced Spousal Entitlements

Individuals who were previously married may qualify for Social Security benefits based on their ex-spouse’s earnings record. To be eligible, the marriage must have lasted at least 10 years, and the claimant must be unmarried at the time of filing. A divorced individual can receive up to 50% of their former spouse’s FRA benefit if they file at their own FRA. Unlike spousal benefits for married couples, an ex-spouse can claim this benefit even if the former spouse has not yet filed, as long as they are at least 62 and the divorce occurred at least two years prior.

If a divorced individual qualifies for benefits on their own work record, they will receive the higher of the two amounts—either their own benefit or the spousal benefit based on their ex-spouse’s earnings. Claiming benefits as a divorced spouse does not impact the former spouse’s own Social Security payments or those of any current spouse they may have. If the ex-spouse passes away, the divorced individual may be eligible for survivor benefits, which can be as much as 100% of the deceased’s benefit.

Taxes on Benefits

Receiving Social Security benefits may result in tax obligations depending on total income. The IRS uses a formula called “combined income,” which includes adjusted gross income, tax-exempt interest, and 50% of Social Security benefits. If combined income exceeds certain thresholds, a portion of benefits becomes taxable. For single filers, up to 50% of benefits are taxable if combined income is between $25,000 and $34,000, and up to 85% is taxable if it exceeds $34,000. For married couples filing jointly, the 50% threshold starts at $32,000, with the 85% threshold beginning at $44,000.

To manage tax liability, retirees can withdraw from Roth IRAs, which do not count toward combined income, or strategically time withdrawals from traditional retirement accounts to stay below taxable thresholds. Some beneficiaries also choose to have federal taxes withheld from Social Security payments to avoid a large tax bill at year-end. Understanding these tax implications is important for budgeting retirement income effectively.