Social Security Optimization

Social Security Optimization

May 06, 2024

There are a lot of moving parts to consider when you look at how to optimize your Social Security benefits. While you are working, you are building up a Social Security benefit. Your benefit is based on the highest 35 years of work history, which is adjusted for inflation over time. There is a strong bias towards lower income earners. In 2024, the first $1,174 per month of earnings gets a 90% replacement of income. This is massive for lower income earners. The next $5,904 per month of income gets a 32% income replacement. The final bend point above the $7,078 ($1,174 + $5,904) all the way up to the income limit gets only a 15% income replacement. This system really helps lower income earners replace a large portion of their income with Social Security. Anyone who is a business owner or who can control how they are paid can use this knowledge to maximize the Social Security benefit over their working years.

When you reach retirement, you need to look at all options for when and how to receive Social Security benefits. Full Retirement Age is 67 for most people who haven’t started receiving Social Security. You are allowed to start Social Security as early as age 62 or delay as late as age 70. There are also considerations if you are married and can receive a spousal benefit; if you are divorced or widowed, there are different rules and benefits.

A common strategy we see and recommend for many clients is for the higher wage earner to delay their Social Security until age 70. This would provide approximately twice as much Social Security income than starting benefits at age 62. This is not always possible, but the delay pays for itself very quickly over the next 5-10 years. The lower wage earner should also delay Social Security income to age 70 since the benefit will double just like the higher earner. There is a stipulation married couples should consider. When one spouse passes away, the lower Social Security benefit goes away. This means you have to consider which spouse is more likely to pass away first. If it is likely that one of the two will pass away before age 80, then it may be worth starting the lower Social Security earlier.

There is also a psychological desire to start withdrawing Social Security even if it doesn’t make financial sense. This leads me to often recommend the lower earning spouse to start their Social Security at age 62 or when they retire. This helps the household cash flow and the psychological desire to start receiving benefits. There are other considerations we can’t discuss here that would affect when and how you should maximize and optimize your Social Security income.