When Should I Claim Social Security?

One of the most common questions our Corient Wealth Advisors receive is, “When should I start my Social Security retirement benefits?” While you’re likely familiar with the basics of Social Security, the decision of when to claim Social Security is unique to each individual and family. Here are a few considerations when evaluating your Social Security benefit claiming strategy.

Cumulative benefits and breakeven age(s)

The Social Security Administration rewards those who delay benefits past their full retirement age (FRA) by increasing annual payments by approximately 8% per year up until age 70. All else being equal, it’s simple arithmetic to determine that cumulative benefits are maximized the longer they’re delayed. Conversely, you may start receiving Social Security retirement benefits as early as age 62, but expect a significant reduction. For example, if you’re 62 in 2024, your benefit would be roughly 30% lower than at the FRA of 67.¹ Keep in mind that all situations are not equal, particularly as they relate to life expectancy and income needs.

To better evaluate your options within this context, it can be useful to determine the respective breakeven age(s) of your various claiming options. By understanding the approximate age(s) when certain claiming strategies begin to produce the highest cumulative benefits, additional perspective can be gained on the trade-off regarding when to claim benefits. This analysis must be customized to your situation. For example, you may have below-average longevity in your family or anticipate much larger income needs during the earlier, more active years of retirement. An analysis of your breakeven age(s) may help provide a framework to determine how you can maximize Social Security benefits for your retirement.

Other income sources

Whether you (and your spouse) have other retirement income sources or are only eligible for Social Security benefits, it’s important to consider how the various vehicles that will fund your retirement can work together.

For example, if you’re eligible for a pension and have the option of delaying and increasing such retirement benefits past your retirement age, you should request pension estimates at various start dates. By doing so, you can determine whether the annual increase of delaying your pension is larger than the increase you’d receive for delaying Social Security benefits. Depending on your current income needs and the assets you have to support those needs, it may make sense to first claim the retirement benefit with the smallest annual increase, allowing the benefit with the larger annual increase to continue growing.

Regardless of your eligibility for a pension, you’ll likely need to supplement your Social Security benefits—most commonly with investment portfolio income and withdrawals—to meet your monthly income needs. While your Social Security benefits will continue throughout retirement, there’s no guarantee your portfolio assets will be there as well, or at least at the level you anticipate and need. An evaluation of your portfolio withdrawal rate will help determine if your current withdrawal rate is sustainable throughout your retirement horizon. With this evaluation, the decision of when to claim Social Security benefits, in concert with your other retirement income sources, can help to increase the sustainability of your portfolio assets.

Finally, if you’re retired and younger than the FRA but still generate earned income through part-time employment or consulting, those earnings could reduce your Social Security benefits. If you’re considering claiming Social Security prior to the year of your FRA and your annual earned income exceeds a certain limit ($22,320 for 2024), be aware that the Social Security benefits you’d receive would decrease by $1 for each $2 you earn above the $22,320 threshold. This earned income limitation threshold is higher ($59,520 for 2024) if you were to file for benefits in the year of your FRA, but prior to your actual FRA month, and in this situation, $1 in benefits is deducted for every $3 you earn above the threshold.²

The income limitations and Social Security benefit reductions described above do not apply if you claim Social Security at or later than your respective FRA.

Tax considerations

An often-undervalued benefit of Social Security income is its preferential tax treatment. When assessed relative to comparable retirement funding sources, such as retirement account withdrawals, pension income, short-term capital gains and non-qualified dividends, Social Security benefits are taxed at a much lower effective rate. While the marginal tax bracket of all these types of income is the same, only a portion of your total Social Security benefits is considered taxable income.

Depending on your “combined income” for the tax year (defined as adjusted gross income plus non-taxable interest plus half of your Social Security benefits), 0%, 50% or 85% of your Social Security income will be subject to federal taxation. Even better, most states do not tax Social Security benefits at all!

If reducing your current tax liability is a priority, accessing Social Security benefits to fund your income needs may be beneficial and could equate to significant tax savings relative to comparable sources of ordinary income (assuming the highest federal and state marginal tax brackets).

RMDs and Roth conversions

While Social Security benefits may be advantageous in mitigating current tax liability, this might not hold true when evaluating a retiree’s cumulative tax liability. Social Security benefits can be an attractive direct alternative to retirement account withdrawals, but the IRS removes this direct, “either-or” decision at a certain point through required minimum distributions (RMDs). Mandating annual withdrawals from retirement accounts once you reach age 72 (or age 70 ½ prior to the SECURE Act) reduces a great deal of flexibility and control over your taxable income. Often, we find that retirees are pushed into higher tax brackets because the IRS is essentially obligating them to generate taxable income through RMDs regardless of their actual need for that income.

This is where the strategy behind Roth conversions comes into play and why it may make sense, from a tax perspective, to delay Social Security benefits. By delaying Social Security benefits and selectively redirecting that potential portion of your annual taxable income toward Roth conversions, you are willingly paying taxes now in an effort to reduce the mandatory, and potentially higher, taxes you’ll be required to pay later. When federal tax rates are low, Roth conversions may be an attractive strategy worth considering in conjunction with your Social Security claiming strategy.

When to claim Social Security

Your Social Security claiming strategy is not a straightforward decision and often has conflicting considerations. Whether you’re far from retirement, in early retirement or approaching your full retirement claiming age, developing an action plan for deciding when to claim Social Security can be valuable and help guide other retirement planning opportunities and strategies.

At Corient, our Wealth Advisors are able to evaluate how various claiming strategies fit into your financial picture. As part of our comprehensive wealth planning services, our advisors analyze each claiming strategy within the context of your overall financial plan, determining the optimal strategy based on your unique financial goals and life circumstances.

¹ https://www.ssa.gov/pubs/EN-05-10035.pdf
² https://www.ssa.gov/pubs/EN-05-10035.pdf

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