Many people think of Social Security as simply a monthly retirement check. In reality, Social Security is one of the most important parts of a retirement income plan. Deciding when to claim Social Security benefits, understanding how benefits are taxed, coordinating spousal benefits, and integrating Social Security with your investment portfolio can have a significant impact on your retirement income.
After working with retirees for more than 22 years, I've found that Social Security decisions are rarely about finding the "perfect" claiming age. They're about fitting Social Security into an overall retirement strategy that considers taxes, longevity, healthcare costs, investment withdrawals, and estate planning.
Here are ten Social Security facts that every retiree and pre-retiree should understand before claiming benefits.
1. Social Security is more than just retirement benefits
Many people primarily view Social Security as a retirement program, but it also offers critical financial support in the event of death or disability.
According to the Social Security Administration, approximately 96% of people aged 20-49 who worked in jobs covered by Social Security in 2023 had access to this financial support. For a young worker with average earnings, a spouse, and two children, that's equivalent to a life insurance policy with a face value of nearly $948,000 in 2023.1
What’s more, about 90% of people aged 21-64 who worked in covered employment in 2023 were insured through Social Security in case of severe disability. While it is not something we like to think about, 8% of recent entrants to the labor force will die before reaching the full retirement age, and many more will become disabled, making Social Security a vital safety net.1
2. Delayed claiming can increase benefits
As stated by the Social Security Administration, for each year you delay claiming Social Security past your full retirement age (FRA), your benefits increase by 8% until age 70. This strategy can potentially benefit individuals who can afford to delay claiming their benefits.2
While waiting to take your benefits may sound like an easy answer, deciding when to begin taking Social Security is one of our most common questions. It may seem straightforward, but it’s more complex than it looks. Since everyone’s circumstances are unique, there are a few considerations that you may want to take into account:
- Will you continue working? Social Security may withhold some of your payment if you work while collecting early benefits.
- Are you married, and does your spouse anticipate benefits?
- How is your health? Your health status could affect your decision on when to start taking benefits.
Your answers to these questions can significantly impact your Social Security strategy.
How Does Social Security Fit Into Your Retirement Income Plan?
A thoughtful retirement income strategy can potentially:
• Mitigate lifetime taxes
• Help investments last longer
• Increase survivor income
• Manage sequence-of-return risk
• Create more predictable retirement cash flow
3. Social Security benefits are adjusted for inflation
Unlike some private pensions, Social Security benefits can be adjusted annually for inflation. This Cost-of-Living Adjustment (COLA) is designed to help maintain the purchasing power of your benefits over time, potentially managing the impact of inflation in retirement. According to the Social Security Administration, the COLA for 2025 is 2.5%. This follows an 8.7% COLA for 2023, one of the most significant increases in recent history due to high inflation the year before. Note that there is not always a COLA increase every year. As the chart shows, there were three times in the past 20 years when beneficiaries received no COLA due to a lack of inflation.3
4. Benefits may be subject to taxation
Many retirees are surprised that their Social Security benefits may be subject to federal income tax. This taxation can affect your overall retirement income strategy. Here's what you need to know:
Taxation Thresholds:4
- Taxation begins when your "combined income" exceeds certain thresholds:
- $25,000 for individuals
- $32,000 for married couples filing jointly
- Your combined income is the sum of:
- Your adjusted gross income
- Nontaxable interest
- Half of your Social Security benefits
- If your combined income exceeds $34,000 (individual) or $44,000 (married filing jointly), up to 85% of your benefits may be taxable.
Managing Tax Payments:4
If you owe taxes on your Social Security benefits, you have two choices:
- Pay the IRS directly when you file your annual tax return.
- Have taxes withheld from your monthly Social Security payment.
- You can choose to have 7%, 10%, 12%, or 22% of your monthly payment withheld for taxes.
State Taxation:
While most states don't tax Social Security benefits, the states that still do, according to an August 2024 report in Kiplinger.com, include Colorado, Connecticut, Minnesota, Montana, New Mexico, Rhode Island, Utah, and Vermont. Each state has its own rules and exemptions.
Strategic Considerations:
- The taxation of Social Security benefits can affect your overall retirement income strategy.
- Consider how other sources of retirement income might push you into a higher taxation bracket for your Social Security benefits.
- Roth IRA distributions are not included in the combined income calculation, potentially making them a valuable tool in managing your tax liability.
- To qualify for the tax-free and penalty-free withdrawal of earnings, Roth IRA distributions must meet a 5-year holding requirement and occur after age 59½. Tax-free and penalty-free withdrawals can also be taken under certain other circumstances, such as the owner's death. The original Roth IRA owner is not required to take minimum annual withdrawals.
By working with financial and tax professionals, you may be able to develop a strategy that is designed to manage your tax burden while seeking to maximizing your retirement income.
5. Spousal benefits can enhance retirement income
Your non-working spouse may be eligible to collect Social Security benefits based on your work record. To qualify for spousal benefits, you must be collecting Social Security retirement or disability benefits, and your non-working spouse must:
- Be at least 62 years old (Any age if you have a child who is younger than 16 in your care or has a disability and is entitled to benefits on your spouse’s record.).
- Be married to you for at least one year.
The maximum spousal benefit is 50% of your full retirement age benefit amount. Social Security will permanently reduce benefits if your spouse claims before their full retirement age. If you delay claiming past full retirement age, the spousal benefit does not increase beyond 50%.5
In the event of your death, your spouse may be eligible for survivor benefits based on your Social Security record but will not receive your benefits in addition to their own—they'll only receive whichever benefit is higher. If your surviving spouse, or a surviving divorced spouse, remarries before they reach age 60, they cannot receive benefits as a surviving spouse while married. If your surviving spouse, or a surviving divorced spouse, remarries after they reach age 60, they will continue to qualify for benefits on your Social Security record.6
Married Couples Have More Social Security Planning Opportunities
Married couples often have more Social Security planning opportunities and flexibility than single retirees when deciding when to claim.
Questions worth considering include:
• Which spouse should claim first?
• Should the higher earner delay until age 70?
• How would an early death affect survivor benefits?
• Will delaying one spouse's benefit improve lifetime household income?
• How will taxes affect both spouses?
Because every couple's situation is different, these decisions are best made as part of a comprehensive retirement income strategy rather than in isolation.
6. Social Security may act as a buffer against market volatility
Because it provides stable income, Social Security offers a steady income stream that is not dependent on market performance. This monthly payment can help cover basic living expenses without tapping into investment accounts during market downturns.
7. Your total benefit might surprise you
You might be surprised by the aggregate Social Security benefit you may be entitled to. The expected value of lifetime Social Security benefits for a single male with maximum taxable earnings ($160,200 in 2023 dollars) who turns 65 in 2025 is $39,800 annually and $634,000 over an average lifespan. For a married one-earner couple with maximum taxable earnings, the benefit would be $59,600 annually starting in 2025 and $1,076,000 total based on life expectancy.7
8. Higher income can mean higher Medicare premiums
You may not be aware that high-income beneficiaries may pay higher premiums for Medicare Part B and Part D. In 2024, individuals with modified adjusted gross income above $103,000 (or $206,000 for married couples) will pay higher premiums. The chart below details the increased monthly costs for Medicare Part B based on income levels.8
9. Social Security offers international benefits
If you're considering retiring abroad, it's essential to know that Social Security benefits can generally be received while living in most foreign countries. This income can provide flexibility in retirement living arrangements. Once you begin receiving Social Security benefits abroad, the Social Security Administration will send you a questionnaire every one to two years. This questionnaire will determine if you are still eligible for benefits. If you do not respond, your benefit payments may be stopped.9
While Social Security payments can often continue if you are living abroad, Medicare won't pay for health care or supplies you get outside the U.S. Some exceptions would allow you to get coverage outside the U.S. under Medicare Part A (Hospital Insurance) and Part B (Medical Insurance).10 So, if you plan to be an ex-pat upon retirement, please speak to a professional about your plans and do your research.
10. The Windfall Elimination Provision may affect benefits
According to the Social Security Administration, individuals who have worked in jobs not covered by Social Security (such as some government positions) and are eligible for a pension from that work may see their Social Security benefits reduced due to the Windfall Elimination Provision. Understanding if this provision applies to you is crucial to accurately determining how much Social Security benefits you can expect.
Don’t underestimate the importance of Social Security
While Social Security may not be the primary source of retirement income for many individuals, it can play a significant role in a comprehensive retirement strategy. Understanding these lesser-known aspects of Social Security can help you make more informed decisions about your retirement and potentially enhance your overall financial picture.
5 Common Social Security Mistakes to Avoid
• Claiming solely because friends did
• Ignoring survivor benefits
• Forgetting taxes
• Claiming before understanding work rules
• Treating Social Security separately from retirement planning
As financial professionals, determining your sources of retirement income and how your different sources can work best together is an integral part of our services. If you have any questions about retirement income, including Social Security, please do not hesitate to contact our office.
Frequently Asked Questions About Social Security
What is the best age to claim Social Security?
There isn't one "best" age. The right decision depends on your health, retirement income needs, marital status, taxes, and long-term financial goals.
Is it better to wait until age 70?
Delaying benefits increases your monthly benefit by approximately 8% per year after full retirement age until age 70. Whether delaying makes sense depends on your overall retirement strategy and life expectancy.
Can I work while collecting Social Security?
Yes. If you claim benefits before your full retirement age, your benefits may be temporarily reduced if your earnings exceed the annual limit. Once you reach full retirement age, the earnings limit no longer applies.
How much of Social Security is taxable?
Depending on your combined income, up to 85% of your Social Security benefits may be subject to federal income tax.
Does Social Security pay benefits to a spouse?
Yes. Eligible spouses may receive benefits based on their spouse's earnings record, and survivor benefits may also be available.
Is Social Security enough to retire?
For many retirees, Social Security provides an important foundation of retirement income, but additional savings and investments are often needed to maintain their desired lifestyle.
1 Center on Budget and Policy Priorities, May 31, 2024
2 Social Security Administration, October 2024
3 Social Security Administration, October 2024
4 Social Security Administration, October 2024. This blog is for informational purposes only and is not a replacement for real-life advice. Consult your tax, legal, and accounting professionals before modifying your Social Security strategy.
5 Social Security Matters, July 15, 2024
6 Social Security Administration, October 2024
7 Urban Institute, July 2023
8 Senior Healthcare Direct, October 2024
9 USA.gov, October 2024
10 Medicare.gov, October 2024