Getting the Highest Social Security Benefit Is More Crucial Than Ever

Americans could see promised Social Security benefits cut by 27% in just 10 years, which means that using the smartest strategies for tapping into your benefits is more important than ever. 

Social Security’s trust fund will be depleted in 2033, a year sooner than previously estimated, according to a Friday report from the system’s trustees. 

Whether that actually happens will likely depend on years of political wrangling, but here are some tips in the meantime for those worried about reduced benefits.

Age Considerations

While Americans can start taking Social Security benefits at 62, that means forgoing higher monthly payments. Claiming at 62 brings a roughly 30% reduction in benefits compared with what a retiree would get it they waited until what the Social Security Administration considers full retirement age, which is 66 or 67, depending on the year you were born. 

Waiting to claim until 67 requires a pot of money to tide you over until then, and that’s not a reality for many Americans. But those who can wait even a few years past 62 will get a higher benefit out of what is, at least for now, a rare promise of guaranteed, inflation-adjusted income for life. 

While many retirees don’t want to use their 401(k) or other retirement savings as a financial bridge, doing so makes a lot of financial sense. Every month that someone delays taking benefits after 62 increases their future benefit, but the big payoffs come in the years between full retirement age and 70. During that period, each year you wait to claim means another 8% in benefits.

It’s a good deal, said financial planner Peter Palion of Master Plan Advisory, particularly because the size of those annual adjustments were set when life expectancies were much shorter. “If this were a commercial annuity, you could not get that kind of income increase by waiting from 67 to 68 to start the income stream,” said Palion.

When Palion speaks with clients about financial risks in retirement, inflation is always a concern, but he also says retirees need to think about longevity risk. Especially for people who are in excellent financial health, have longevity in their family, and exercise and eat right, it makes a lot of sense to wait to claim Social Security to get a higher benefit, he said. 

If you can afford to live on money held in an IRA while waiting to claim Social Security, there’s a side benefit — when you’re required to take minimum distributions from retirement accounts in your 70s, you’ll pay less in taxes on the shrunken amount. 

Strategies for Couples

For married couples, claiming strategies can get complicated. Many people mistakenly think that if a spouse passes away, they can get both sets of benefits, said financial planner Nicholas Bunio of Retirement Wealth Advisors. Instead, the surviving spouse only gets the higher of the two.

A common strategy for couples is for the lower-earning spouse to claim their benefit at full retirement age, while the higher earner continues to defer the retirement benefit until 70, said financial adviser Kevin Brady of Wealthspire Advisors.

“This can be a hedge against the risk that the higher-earning spouse deferring until 70 passes away earlier than their life expectancy, since the surviving spouse only receives the higher of the two benefits and not both,” Brady said.

In the case where a younger spouse earns less than a considerably older spouse, “it almost always makes sense for the older spouse to begin taking benefits at 70,” said Stephen Maggard of Abacus Planning Group. “This allows the younger spouse to earn a higher benefit for longer after the first spouse's death.”

A client of financial planner Marguerita Cheng, of Blue Ocean Global Wealth, did something a little different. At 62, she first claimed benefits based on the earnings of her late spouse. The client then waited for her own benefit to grow, and switched over to her benefit payments at full retirement age.

“Social Security is not just a monthly check,” said Cheng. “It provides inflation adjusted-income for a lifetime for yourself, your spouse and your survivors.”