Costly Blunders in Social Security Management That May Set You Back by $100,000 or Even More
In 2024, claiming Social Security benefits is a decision that requires careful consideration, taking into account factors such as age, health, life expectancy, spousal needs, tax situation, and retirement income sources.
Know Your Full Retirement Age (FRA)
For those born between 1943 and 1954, the FRA is 66. For individuals born between 1955 and 1959, the FRA increases monthly up to 66 years and 10 months. For those born in 1960 or later, the FRA is 67.
Impact of Claiming Age
Claiming Social Security early at 62 can result in a permanent reduction of up to 30% in benefits. Claiming at FRA yields full benefits with no reduction. Delaying past FRA increases benefits by 8% per year up to age 70, a maximum 24% increase if FRA is 66.
Strategies for Different Age Groups
For those born before 1960, it's recommended to delay Social Security until age 70 if health and finances allow, to maximise lifetime benefits. If earlier income is needed, use staggered or hybrid strategies where one spouse claims early and the other delays to boost survivor benefits.
For those born in 1960 or later, the balance between early claiming at 62 with reduced benefits versus waiting to claim at 67 or later is critical, depending on health, work status, and financial needs. Working until at least FRA helps maximise earnings record and thus benefit amount.
Spousal & Survivor Benefits
Married couples should coordinate claims to maximise combined lifetime and survivor benefits. Strategies such as "file and suspend" and "restricted application" are no longer available for most; now couples use staggered claiming or hybrid approaches.
Tax Considerations
Since tax law changes affect Adjusted Gross Income (AGI) and taxation of Social Security benefits, retirees should stay under AGI thresholds ($75,000 single, $150,000 joint) to maximise tax deduction eligibility. Consider Roth IRA conversions strategically to reduce future Required Minimum Distributions (RMDs) and taxable income. Claiming early may be beneficial if AGI is low to enjoy tax-free Social Security for some years.
Special Cases
Federal Employees Retirement System (FERS) retirees have additional coordination options, such as using the FERS Special Retirement Supplement to bridge until 62 and delay Social Security benefits to increase lifetime payout.
Summary
The optimal Social Security claiming strategy depends on individual circumstances, but key principles include working longer to improve earnings record up to FRA or beyond, delaying claiming Social Security benefits to age 70 if possible, coordinating spousal claims to optimise lifetime and survivor benefits, managing taxable income to reduce tax impacts on Social Security, and considering personal health, financial needs, and life expectancy seriously.
Remember, if you claim benefits before your FRA and continue working, your monthly payment might be cut further, depending on your income. Nearly three-quarters of American adults worry about Social Security running out of money in their lifetime, making it even more crucial to make informed decisions about when to claim your benefits.
Personal-finance management and defining the right Social Security claiming strategy is essential for a secure retirement. Given the impact of claiming age, investing wisely, and understanding business implications such as Adjusted Gross Income and retirement income sources, defi strategies can help maximize personal-finance by optimizing the timing of Social Security benefits to account for individual factors like age, health, and life expectancy. Generating more income through work or alternative investments while adhering to tax considerations ensures the most financially beneficial approach to personal-finance and Social Security investment.
