Social Security plays an important role in retirement planning for millions of Americans. It provides a foundation of income that helps support retirement needs, survivor benefits, or disability income. While it may seem straightforward on the surface, the rules behind Social Security are complex. Decisions about when and how to claim benefits can influence the amount you receive over your lifetime.
Many people reach retirement age without fully understanding how the program works, what their options are, or how their choices may impact taxes and long-term income planning. Concerto Financial helps clients explore these questions so they can make informed decisions aligned with their personal situation. While Social Security is only one part of a retirement plan, understanding the details can provide clarity about what to expect.
This guide offers a comprehensive look at Social Security, how benefits are calculated, what claiming choices exist, and which factors may influence the timing of benefits. The goal is to help you understand the structure of the program so you can feel confident when evaluating your options.
The Purpose of Social Security
Social Security was created to provide a financial safety net for older Americans after their working years, as well as support for disabled individuals and survivors of deceased workers. The program is funded through payroll taxes paid by workers and employers. These taxes go into the Social Security Trust Funds, which are used to pay benefits to eligible recipients.
Social Security is not intended to replace an entire income. Instead, it serves as one component of a broader retirement strategy that may include savings, pensions, personal investments, and other income sources. Many people find that a thoughtful understanding of Social Security helps them see how the benefit fits within their overall financial picture.
How Social Security Benefits Are Calculated
The amount you receive from Social Security is based on several factors. While the formulas are detailed, the core elements are fairly straightforward.
1. Your Work History
Social Security calculates your benefit using your 35 highest earning years. If you worked fewer than 35 years, the missing years are filled with zeros, which lowers the overall average.
Each year’s earnings are indexed to account for changes in wage levels over time. This indexing helps ensure that earlier working years are adjusted to reflect current wage standards.
2. Your Average Indexed Monthly Earnings (AIME)
After adjusting your highest 35 years of earnings, Social Security calculates your Average Indexed Monthly Earnings. This number becomes the foundation for determining your benefit amount.
3. Your Primary Insurance Amount (PIA)
Your Primary Insurance Amount represents the benefit you would receive at your Full Retirement Age (FRA). FRA is determined by your birth year and currently ranges from age 66 to 67 for most workers.
The PIA formula uses three breakpoints, known as bend points, which apply different percentages to different portions of your income. This structure is designed to replace a higher proportion of income for lower earning workers.
4. Adjustments Based on Claiming Age
Although your PIA is established at Full Retirement Age, your actual monthly benefit depends on when you claim. Claiming early will reduce your monthly amount, while delaying benefits beyond FRA will increase your payment.
A deeper look at how timing affects your benefit is covered in a later section.
Understanding Full Retirement Age
Full Retirement Age is a central concept in the Social Security system. It is the age at which you are eligible to receive your full PIA without reductions or increases. FRA depends on your birth year, according to the following schedule:
- Birth years 1943 to 1954: FRA is 66
- Birth years 1955 to 1959: FRA gradually increases in two month increments
- Birth year 1960 or later: FRA is 67
Knowing your FRA is essential because it sets the baseline for determining how much your benefit will change if you claim early or delay.
Claiming Benefits Early
You can begin claiming Social Security retirement benefits as early as age 62. For many individuals, this can be appealing if they want to retire sooner or if they need the income earlier. However, claiming early will permanently reduce your benefit.
The reduction is based on the number of months before your FRA. For most people, the reduction for claiming at 62 is about 25 to 30 percent lower than the amount you would receive at FRA.
Here are common reasons individuals consider early claiming:
- They retire before FRA and want income to support their lifestyle.
- They have health concerns that may affect longevity.
- They prefer to preserve personal savings early in retirement.
- They anticipate needing stable income sooner than later.
Early claiming is not right for everyone. Concerto Financial helps clients evaluate the long term implications of taking benefits early, especially when planning for long retirement periods.
Delaying Benefits Beyond Full Retirement Age
If you choose to delay your Social Security benefit beyond your FRA, you receive delayed retirement credits. These credits increase your monthly benefit for each month you wait, up to age 70.
Delaying benefits can increase your payment significantly. For example, waiting from age 67 to age 70 results in roughly a 24 percent increase in your monthly benefit.
Reasons individuals consider delaying benefits may include:
- They want a higher lifetime income stream.
- They expect a long retirement timeframe.
- They are still working and do not yet need the income.
- They prefer to build a stronger foundation of guaranteed income later in life.
- Their spouse may benefit from a higher survivor payment.
Concerto Financial helps clients understand how delaying benefits compares to claiming earlier, taking into account other income sources and personal circumstances.
Understanding Spousal Benefits
Spousal benefits allow one spouse to receive a benefit based on the other spouse’s earnings record. This can be helpful in cases where one spouse earned significantly more over their lifetime.
Key points about spousal benefits include:
- Spousal benefits can be up to 50 percent of the higher earning spouse’s PIA if claimed at Full Retirement Age.
- Claiming spousal benefits before FRA results in a reduced amount.
- A spouse must be receiving their own benefit for the other spouse to claim a spousal benefit.
- A person eligible for both their own benefit and a spousal benefit will receive the higher of the two.
Spousal benefits can be complex, especially when both spouses have work histories. Concerto Financial helps couples evaluate which claiming approach may align with their retirement strategy.
Divorced Spousal Benefits
Individuals who were previously married may be eligible for a spousal benefit based on an ex spouse’s earnings record if certain criteria are met.
You may qualify if:
- The marriage lasted at least 10 years.
- You are currently unmarried.
- You are age 62 or older.
- Your ex spouse is eligible for Social Security benefits.
Your ex spouse does not need to be actively receiving benefits for you to qualify, as long as they are eligible.
The divorced spouse benefit rules mirror the spousal benefit rules, including the potential to receive up to 50 percent of the ex spouse’s PIA. Concerto Financial helps clients evaluate this option in coordination with their own retirement plans.
Survivor Benefits
Survivor benefits provide income to the spouse or dependents of a deceased worker. These benefits help ensure that the worker’s family has continued access to financial support.
Survivor benefits can be available to:
- Widowed spouses
- Divorced spouses (if the marriage lasted at least 10 years)
- Minor children
- Disabled children
- Dependent parents
The amount of a survivor benefit depends on the deceased worker’s earnings record and the age at which the survivor claims the benefit.
Several important rules apply:
- Widowed spouses can claim benefits as early as age 60.
- Surviving spouses with disabilities can claim as early as age 50.
- Survivor benefits can be coordinated with personal retirement benefits, which can create planning opportunities.
- Claiming survivor benefits early may reduce the amount received.
Because survivor benefits have many variables, Concerto Financial works with clients to understand how these benefits interact with their retirement income strategy.
Disability Benefits
Social Security Disability Insurance (SSDI) provides income for individuals who cannot work due to a qualifying medical condition. Eligibility requires a specific number of work credits and proof of disability that meets Social Security’s definition.
While disability benefits are separate from retirement benefits, individuals receiving SSDI may transition into retirement benefits once they reach Full Retirement Age. This transition is automatic.
Understanding how disability benefits work can help individuals who are unable to work plan for their long term financial needs with more clarity.
How Working Affects Social Security Benefits
Many people choose to work part time or full time while collecting Social Security. If you have not reached Full Retirement Age, your benefits may be temporarily reduced if your earnings exceed certain annual limits.
For example, in years before reaching FRA, Social Security withholds one dollar in benefits for every two dollars you earn above the annual earnings threshold. However, once you reach FRA, the withholding rules end. Any withheld benefits may be credited back to you in the form of a higher benefit in future years.
It is important to understand that working while collecting benefits does not permanently reduce your Social Security amount. It simply adjusts benefits based on income rules during the years before FRA.
Concerto Financial helps clients evaluate working and retirement decisions so they can plan for both income and tax considerations.
How Social Security Is Taxed
Many people are surprised to learn that a portion of their Social Security benefits may be taxable. The taxable amount depends on your provisional income, which includes:
- One half of your Social Security benefits
- All taxable income
- Nontaxable interest income
Based on current IRS rules, up to 85 percent of Social Security benefits may be considered taxable income for higher income households. The specific amount varies depending on your filing status and total income.
Concerto Financial helps clients explore tax efficient withdrawal strategies that take Social Security taxation into account, keeping in mind that tax laws can change over time.
Medicare and Social Security
Many individuals consider Medicare and Social Security together because they often begin around the same timeframe. While these programs are separate, they are closely connected for most retirees.
Key points include:
- You become eligible for Medicare at age 65, regardless of when you claim Social Security.
- If you are already receiving Social Security when you enroll in Medicare, premiums are typically deducted from your benefit.
- If you delay Social Security past age 65, you pay Medicare premiums out of pocket until you begin receiving benefits.
- Your income can affect your Medicare premiums through income related monthly adjustment amounts, known as IRMAA.
Coordinating Social Security and Medicare can help reduce surprises as you enter retirement. Concerto Financial walks clients through these details so they can prepare with clarity.
Strategies for Claiming Social Security
Because Social Security has many variables, there is no universally correct age to claim benefits. The right approach varies based on personal, financial, and health circumstances.
Below are several common strategies individuals consider.
1. Claim Early and Preserve Other Assets
Some individuals choose to claim benefits early to avoid drawing down personal investments in their sixties. This approach may make sense for those with shorter life expectancy or those who need income sooner.
2. Delay Benefits for Higher Future Income
Delaying benefits can create a stronger income stream later in life. Individuals who expect a long retirement timeframe often explore this option.
3. Coordinate Spousal Benefits
Couples can evaluate multiple combinations of claiming ages to support household income needs. Sometimes one spouse claims early while the other delays to build higher long term benefit amounts.
4. Use Survivor Benefit Planning
Widowed individuals may have additional options for transitioning between survivor benefits and personal retirement benefits. This flexibility can create opportunities to maximize lifetime income across different claiming ages.
Concerto Financial provides guidance that helps clients compare these approaches based on their personal situation, retirement goals, and tax considerations.
Common Myths About Social Security
There is a significant amount of misinformation surrounding Social Security. Understanding what is accurate can help you make better decisions.
Myth 1: Social Security will disappear before I retire
While projections show long term funding challenges, Social Security is expected to continue paying benefits even if the trust funds require adjustments. Future changes are possible, but benefits are not expected to disappear entirely.
Myth 2: You must stop working to collect Social Security
You can work and collect at the same time. Earnings may temporarily reduce benefits before FRA, but this reduction is not permanent.
Myth 3: Everyone should delay benefits until age 70
Delaying can increase payments, but it is not the right choice for everyone. Income needs, health, and personal priorities all play important roles.
Myth 4: You get more by claiming as soon as possible
Claiming early provides income sooner, but it reduces monthly benefits permanently. This tradeoff should be evaluated carefully.
Myth 5: Social Security planning is only about the benefit amount
Social Security interacts with taxes, Medicare, spousal benefits, survivor benefits, and long term withdrawal planning. It is one part of a broader financial strategy.
Key Takeaways
- Social Security plays a significant role in retirement planning. Understanding eligibility rules, claiming options, and taxation can help individuals make informed decisions.
- Waiting to claim benefits can increase payments, but personal factors determine whether this approach fits your situation.
- Spousal, divorced spousal, survivor, and disability benefits can provide important support for families.
- Working with a financial professional can provide clarity about how Social Security fits into a broader retirement strategy.
Final Thoughts
Social Security is one of the most important income sources for retirees. Yet many people find the rules complex and the decisions overwhelming. Whether you are close to retirement or planning ahead, understanding the details can make a meaningful difference in how you approach your long-term financial plan.
Concerto Financial helps clients review their choices with clarity. By understanding how Social Security fits with your savings, tax strategy, and retirement goals, you can make informed decisions that support your lifelong financial wellness.
If you would like support evaluating your Social Security options or coordinating them with the rest of your retirement plan, we are here to help. Contact us today to schedule your consultation.
Disclosures
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. Asset allocation does not ensure a profit or protect against a loss.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
This material was prepared by NLA Media