When it comes to Social Security, timing is everything. The decision of when to start taking benefits can have a lasting impact on your retirement income. While Social Security was never meant to replace your full paycheck, it provides essential financial security for millions of retirees. Understanding how benefits are calculated, how your decision affects your long-term income, and the impact of working while collecting benefits can help you make a more informed choice.
Your Social Security benefit is based on your highest 35 years of earnings, adjusted for inflation. If you don’t have 35 years of work history, those missing years count as zeros, reducing your benefit. Once your earnings history is established, the Social Security Administration applies a formula to determine your Primary Insurance Amount (PIA), which is the benefit you’d receive if you claim at your Full Retirement Age (FRA). For most people today, FRA falls between 66 and 67, depending on the year they were born.
Claiming Social Security before your FRA permanently reduces your monthly benefit. If you claim at 62, the earliest possible age, your benefit could be reduced by around 30% compared to waiting until full retirement age. That reduction lasts for life, so while early benefits may seem appealing, they come at a cost. On the other hand, delaying benefits past your FRA increases your monthly check by about 8% per year until age 70. That means waiting could provide a significantly larger payout, which is particularly beneficial for those who expect to live a long life or want to maximize benefits for a surviving spouse.
Consider two examples.
Lisa’s FRA benefit is $2,000 per month. If she claims early at 62, she receives about $1,400 per month – a $7,200 annual reduction. But if she waits until 70, her benefit grows to roughly $2,480 per month. Mark, on the other hand, is in good health, has a family history of longevity, and doesn’t need Social Security at 67. By waiting until 70, he secures a much higher benefit for the rest of his life. If he lives into his 90s, delaying could mean tens of thousands of dollars in extra income.
If you plan to work while receiving Social Security before your FRA, be aware of the earnings limitation test. In 2024, if your earnings exceed $22,320, Social Security withholds $1 for every $2 earned over the limit. The year you reach FRA, the threshold rises to $59,520, with only $1 withheld for every $3 earned above that. Once you reach full retirement age, the earnings test disappears, and any withheld benefits are recalculated into future payments.
Taxes can also impact your Social Security benefits. If your combined income – adjusted gross income plus nontaxable interest and half of your Social Security benefits – exceeds $25,000 for individuals or $32,000 for couples, up to 50% of your benefits may be taxable. If it exceeds $34,000 ($44,000 for couples), the taxable portion rises to 85%. Many retirees don’t expect to pay taxes on Social Security, but these thresholds are relatively low, making tax planning an essential part of retirement strategy.
For those who want to work while collecting Social Security, proper planning can help minimize tax burdens and avoid benefit reductions. Delaying benefits until full retirement age eliminates the earnings test. If you’ve already claimed benefits and reconsider your decision, you may be able to suspend payments at FRA or, if within 12 months of starting, withdraw your application and repay what you’ve received. Managing taxable income by shifting withdrawals from tax-deferred accounts to lower-income years or prioritizing Roth distributions, which don’t count toward Social Security taxation, can also be beneficial.
Deciding when and how to take Social Security is a personal choice, dependent on health, financial needs, and long-term goals. By understanding the rules and planning ahead, you can maximize your benefits, minimize surprises, and create a retirement income strategy that works for you.
Reach out if you have any social security questions. Through our Purpose-Built Planning process, we take a personalized approach to help clients make informed decisions about when and how to claim benefits. Our goal is to maximize lifetime income, minimize potential tax burdens, and ensure Social Security fits seamlessly into a comprehensive retirement strategy.
