🕒 When Should You Take Social Security? | 2025 Retirement Planning Guide

Unedited Transcript:

Hello, everyone, and welcome back to another social security webinar for 2025. Unlocking your social security. Will's here with me, our Director of Financial Planning.

We're going to walk through social security, try to answer as many questions as you might have as you lead into deciding when to take social security and how to take social security and get you prepared for those decisions here. So let's jump right into it. First question is, how is social security earned? We'll update you a little bit just in case you want to go backwards a little bit.

So the first is you earn social security through paying FICA tax. So with every dollar you earn, 6.2% of that is paid by you in FICA tax and 6.2% of your earnings is paid by your employer into the social security system. You only pay that 6.2% on the first 176,100 dollars of earnings that you have.

So any dollar you earn over that does not get charged that 6.2% and get contributed to the social security system. Lastly, you have to have 40 credits to be eligible for social security. Pretty easy to earn a credit.

Most of you earn all your credits. Not a big deal, but you do need to earn 40 credits. You get four credits per year as long as you earn one thousand eight hundred and ten dollars.

So FICA tax is how you pay into the system from your wages only on the first 176 grand. Next is when can you start the social security benefits? So obviously, probably one of the maybe the number one question we get will when it comes to retirement planning is when to start social security. So as far as when you're eligible, so your full retirement age depends on what year you were born.

Everyone is eligible to start social security as early as 62, and you can delay it as long as age 70. We'll go through some pros and cons of that later down the road. But as you can see here, based on the year in which you were born, what your full retirement age benefit is.

Now, this is not this has anything to do with what the Social Security Administration believes, you know, is the standard retirement age. And you definitely can retire earlier. You do stop contributing.

So your benefits are a little lower. This is just a social security way of way saying, hey, you take it before this. You can have a little bit of a reduction if you take it after this age.

We're going to give you a little bit of a bonus for darn near everyone watching this year for retirement. It's going to be either 66, 67 or somewhere directly in between. The next is how these social security benefits are calculated.

So the first is the average indexed monthly earnings. Second is the primary insurance amount. And lastly, you get to increase or decrease based on how long you wait to start taking.

So that is take it early at 62. You get less, take it past your full retirement age. You end up getting more.

Let's dive into each one of those a little bit. So the first is the average indexed monthly earnings. So your average indexed monthly earnings is starting from the point for figuring out your social retirement benefits, your top 35 years of work.

So Social Security is going to look at your thirty five highest earning years of work history. If you did not work thirty five years, then you just get zeros for all those total years. If you only work 30, you get five zeros.

The next thing they're going to do is adjust for inflation. So they even if you earn some money back in 1982, they're going to inflation adjust that wage to modern day numbers. And then lastly, the total of those thirty five years after adjustments for inflation is divided by four hundred and twenty months to get your average monthly indexed earnings there.

So pretty complex formula. Good news. So Social Security doing all that calculation for us as does our financial planning software.

We can plug in historical earnings, projected forward earnings, run the same formula and get pretty darn accurate. Social Security estimates before your filing ages. The next is the primary insurance amount.

The amount of money Social Security will pay you each month if you retire at full retirement age. So if you log on to SSA dot gov slash my account, which is the best way to go on and see all your historical earnings, you can audit those earnings, make sure the historical earnings are accurate. Never hurts to check that.

But you'll be able to see what your primary insurance amount or what your Social Security benefit is going to be at your full retirement age. There's also a little play zone there where you can move it ahead or move it later, and it will adjust how much your Social Security benefit is projected to be based on when you take it. If you keep in mind that if you tell the system you're going to retire earlier, right, it's doing two things and taking Social Security earlier.

It's doing two things. It's reducing your benefit because you didn't wait all the way to full retirement age. But it's also reducing your benefit because you didn't work and put in more money through that period of time also.

So it does get adjusted there twice if you take it early and retire early. And then lastly, kind of what that formula looks like. So this is an example of what the reduction would be if you take it early.

We're going to use a full retirement age of 67. For this example, you can see you get about a six, a little less than 7% reduction for each year that you take it before your full retirement age, going all the way to 70% of what your full retirement age benefit would have been if you take it at 62. Now, if you delay it past your full retirement age, you can see you get about an 8% increase to your Social Security benefit.

A little bit of a bonus to delay it all the way up to 124% if you delay all the way to age 70. So obviously, we'll get into pros and cons of each of this. But this is why financial planning in a nutshell is so important, is to determine what of these filing ages make the most sense for your particular plan and situation.

So with that, let's jump over to Will, who's going to walk us through some of the more complex benefits and claiming options here. Yeah, thanks, Sean. So that was a great breakdown of your own benefit.

But few people know this. There's actually other benefits that you may potentially qualify for as well. The first one being spousal benefits.

There's also survivor benefits and divorce spousal benefits and divorce survivor benefits as well. So let's start with spousal benefits. This is a scenario where you are married and your spouse's benefit is more, a lot more than your personal benefit.

So you are eligible to receive half of your spouse's full retirement benefit, but only if certain rules are met. And I'll go through those here briefly. So you can't get spousal benefits until your spouse files their own Social Security.

So if they haven't filed yet, you'll have to wait. You have to also be married for at least one year and you must still be currently married to qualify. The timing still does matter.

So if you start collecting your spousal benefits before your full retirement age, your spousal benefits will be reduced as well. So similar to your own personal Social Security, they'll still look at your age and when you file. However, unlike your Social Security, there is no extra benefit to you waiting past your full retirement age if you're taking spousal benefits.

So they do not grow, you delay beyond your full retirement age, but they are reduced if you do take them before your full retirement age. Similar situation, if your spouse files early, if your spouse files their own benefits before their full retirement age, then your spousal benefits will be reduced based on you'll basically get half of whatever they filed and end up receiving there. So some unique rules surrounding spousal benefits, but it is a great opportunity if, you know, one spouse was the primary earner and the second spouse did not work for the majority of their marriage.

You know, you're not going to be stuck with a very, very low own benefit if you didn't work and contribute to the Social Security system. You can end up taking spousal benefits and potentially get a higher benefit that way. Next, we'll move into survivor benefits.

This is if you are married, you were married and one spouse passes, you may be eligible to receive the full amount of their Social Security benefit. Now, there are some rules to this as well. You can begin them as early as age 60, but they will be permanently reduced if you start that early.

You also must have been married for at least nine months before your spouse passed. You must be either unmarried or if you remarried, it must be after the age of 60 and same kind of rules apply. If your spouse files early, say at age 62, you know, your benefit may be lower and it won't increase if you wait.

If your spouse filed at full retirement age, but you file before your own full retirement age, your survivor benefit may be reduced as well. The best way to get the maximum amount out of this benefit is to wait until your own full retirement age to file. The most common scenario that we see with survivor benefits is you both were receiving Social Security, but one spouse's benefit was higher than the other.

The one whose benefit was higher passes before the lower earning spouse. And then the surviving spouse gets to keep the larger of the two benefit amounts. But this is key to note, you do not get both.

So if one spouse passes away, you get to keep the higher of the two benefits, but only the higher of the two benefits and you do not get to receive both. So important to note there. There's also opportunities for if you were previously married for both spousal benefits and survivor benefits, pretty much the same as, you know, regular spousal benefits.

The only thing to take into consideration is, you know, timing of divorce and if you are currently still married or unmarried. So you must have been married to your ex for at least 10 years. You have to be 62 years old and then you have to remain currently unmarried to receive those divorce spousal benefits.

You do not need your ex's permission to take this benefit. And again, the timing does affect the amount you'll receive. If you file before your full retirement age, your benefits will be permanently reduced and no extra credits for delaying past full retirement age.

And again, this is only one benefit. This is not in addition to your personal benefit. This is you can either take the spousal benefit you may be eligible for or your own social security benefit, but not both.

Same type of deal with divorce survivor benefits. You must have been married for at least 10 years and then either unmarried or remarried after age 60. You can start as early as age 60, but it will be reduced again.

And then it depends on when your ex spouse claimed for calculating how much you will receive. It also, you know, depends on if they claimed it early or delayed and it's going to be based on what they were actually receiving. And then you can determine, Hey, is survivor benefit of my ex spouse going to be more than my source than my own social security benefit or not? And then you can, you can determine what you're going to take based on that calculation.

So a lot of different options there. It's important to know your options or definitely work with someone who is aware of all your options and just simply compare, you know, what would I be receiving from the social security administration if I chose this strategy versus taking my own social security benefit and how that relates to your overall financial plan as well. But a lot of options to just be aware of.

Next we'll talk about something known as the earnings test. You may be familiar with this and you may have heard of this, but a very complex rule here. So essentially if you start social security before your full retirement age, but you continue to work and earn an income the social security administration penalizes you a little bit.

Maybe penalize isn't the entirely correct word, but they will withhold a bit of your social security benefit if you make more than the amounts listed below. So it's important to note that part of your social security check is going to be withheld, but that money is not lost forever. So once you reach full retirement age, your benefits will actually be be increased to compensate you for the withholding that you were receiving while you were working and receiving social security before your full retirement age.

Important to note that it will only look at your income. It won't look at your household's income or your spouse's income. It is solely based on how much the person collecting social security is earning for work.

And it's very important to note as well that if you wait to file beyond your full retirement age and you continue to work, you can see on that top line there, there is no limit to how much you can earn after your full retirement age and still receive your full social security benefit. There's no impact on benefits there. In the year in which you reach your full retirement age, so most typically in the year you turn 67 or retirees now, if you earn more than $62,160, a dollar in social security is withheld for every $3 above the social security limit that for every $3 above the $62,160 limit there.

If you are taking social security before your full retirement age and continuing to work, you can only earn $23,400 before $1 of every before $1 in social security is withheld per every $2 above that you make above that $23,400 limit. So basically, um, you know, you're penalized by half of what you earn over that $23,400 limit. So that's a very low limit.

And we'll talk about this a little bit more in depth later, but that typically leads us to say, Hey, if you're continuing to work beyond age 62, which a lot of retirees are, you know, don't take social security, right? I mean, you're going to more than likely get penalized and not even receive your full benefit. And you have the ability that if you don't take social security while you're still working to let that benefit grow and compound and get bigger for you. So that's typically what we see.

Again, everybody's situation is different, but it's important to know these rules, um, before you make a decision to take social security, because once you choose to file and take social security, that is a permanent decision and you can, you can't reverse that. So very important to know there. Okay.

It's important to know also that benefits may be taxed as well, depending on your income. So there's a very complex way that they calculate income and determine what your income is to determine if you're over the specific break points for each of these taxable thresholds. That complex calculation is on the left there.

You can see the different components and how they add that in together to get ultimately your provisional income there at the bottom. You can see then on the right hand side of the screen, the differences and the break even points for single filer versus joint filer. We'll focus on joint filers for now.

But you can see if that complex calculation there on the left equals anywhere below a $32,000, then none of your taxable, then none of your social security benefit is taxable. You can see then it increases to 50% of your social security benefit is taxable from $32,000 to $44,000 in income based on, based on that calculation and provisional income. And then ultimately if it's over $44,000, then 85% of your benefit is taxable for a joint filer.

Typically in the plans that we deal with, you know, everybody hits that $44,000 limit. It is pretty difficult to take social security as well as, you know, keep your taxes low enough so that not all 85% is taxable as far as your social security goes. So typically you're going to pay that 85% tax and it's going to be kind of unavoidable, but depending on how you structure your income, you could, you know, keep that limit below that $44,000 number.

But typically that's not what we see. It's more advantageous and likely that you're going to enjoy the retirement income, you know, take your income and live the way you want to live. And that's ultimately over that $44,000 limit there.

One new thing this year is the new tax law. I'm sure you've heard the no tax on social security catchphrase, if you will, of the new bill that was just passed, be thrown out there. However, you know, that is not necessarily accurate.

The only thing that this actually does is it implements a new enhanced senior deduction on your tax on your taxable income. So it's basically just a $6,000 tax deduction for any individual age 65 or older that comes after your standard or your itemized deduction. It doesn't even matter if you're receiving social security or not.

It only matters if you're over age 65. So the biggest winners from this are actually those who are over 65 but not taking social security yet because none of that social security income has to go against your tax return. However, you're still eligible for this $6,000 deduction.

So social security is not tax free technically and social security income is still taxable based on that calculation in the slide that I just kind of went over previously. But it does subject you to a phase out. So this does phase out for single filers at above 75,000 in AGI and married at above 175,000 AGI is when this starts to phase out.

But a new wrinkle to the social security puzzle and the tax puzzle that we are keeping our minds on top of and taking into account when we run your financial plans. Awesome. Thanks, Will.

So, you know, the million dollar question is, you know, now that we know how it's calculated, what are the different filing strategies, the different filing options is, Hey, when do I actually, you know, file this thing and turn it on? So let's look at, you know, we've got about six different things to consider before you ultimately decide to turn on social security. So these six are important, but the biggest one is, is how it fits inside your financial plan, right? Let's not, you know, undervalue the importance of being extremely detailed in your financial plan, being completely honest and open about your needs and your goals and your income and your spending, because all of those factors help Will and I determine when is the optimal strategy for you to take social security. So these are high level overviews, but there's going to be an optimal decision for each and every household out there that takes a lot more work than just kind of looking at this from a high level.

So the first is the earnings test, right? Will you work past 62 as Will mentioned, you got to give, you know, a dollar back for every two you earn in social security benefits over that $26,000 number. And so if that is going to be you, there's a pretty good chance we'd recommend you to continue to delay social security. Not only do we not want you to have to, you know, only get 50% of your benefit, but keep in mind, if you don't file, you get that increase every year you delay.

So very important that, you know, more often than not, if you're going to work past 62, we're going to continue to delay social security. The next is how much you need or want to spend in retirement. You know, so what impact does taking social security have on your longterm probability of success of your comprehensive financial plan, taking it early, you know, might sound good.

You get more income, you know, really it's not traditionally more income because if you don't start it, you just take that amount out of your portfolio. So you're not really netting out any additional income by turning on social security. But how does it impact your probability of success based on, you know, having more money coming from social security later in life and for longer by delaying, or maybe you don't have as much saved up in assets.

You know, maybe your family history and all that doesn't lead you to think you can, you know, hit the break even marks. And so taking it a little bit early, but how much your total going to spend, how much you have saved is a huge factor in when to start taking it. How much money do you want? So three, and this is one that, you know, we, we talk about, analyze a lot is how is the market, both stock and bond markets doing, and how is the economic outlook for the year you retire or the first few years that you retire? The way the market has been stock market in general over the last several years with some consistent solid returns is traditionally we can get the income or not traditionally.

We have been recently been able to get you the income you need to live off of through the profits and returns of your investment portfolio. So in these cases you kind of get the best of both worlds. You get to delay your social security, right? And have that benefit get bigger and bigger, not have to have any less income because the market is producing this income for you.

You are able to take the income you need to live off of in retirement through the returns of the market. Plus interest rates have been a little bit higher. So our dividends and interest can be calculated in that.

So ultimately how well the market is performing is a big indicator on when to take social security. Eventually at some point we will go through a economic slowdown and or recession when those stock market returns or that interest is not as much as it has been. And this, you know, might flip to the other side where it says, Hey, we're not able to produce the income we need to live off of, off of our portfolio.

It's time to ease the burden on our portfolio and start social security. So the economic outlook and the returns of the market are a big factor in taking these. And then Will's going to tackle these next three.

Yeah. So the next thing to think about is how does your tax situation look? Do you have large sums of money in traditional IRAs? Is it advantageous for your situation to delay social security, give you more time to do Roth conversions, take advantage of those low income years, convert some money to Roth in low tax brackets. That's a very important thing to look at.

Do you have a lot of money in, you know, non-taxable accounts? Do you have a large cash position that you've built up that you can live off of and not pay taxes on to withdraw? Then, you know, maybe it makes sense to delay social security a little bit more and look into these Roth conversion strategies. Will one spouse be receiving a spousal benefit, right? How does the timing of that look? Does it make sense to file the spousal benefit at age 67? Even if the higher earning spouse is not at full retirement age, how do those benefits play off of each other? What benefits are you eligible for? That's another very important thing to keep in mind. And then do you qualify for a survivor benefit at all? There's actually a strategy where you can claim your survivor benefit and then allow your personal benefit to grow.

This is only the survivor benefit. This doesn't include spousal benefits at all. But if you claim a survivor benefit that you may be qualified for, you can actually continue to delay your own social security benefit.

And this may be a beneficial strategy to some individuals. So that's all we had. But thank you for your time and I'll take it back to Sean to see if he has any, any other closing remarks.

Yeah, thanks Will. Appreciate your time. Appreciate your expertise.

Yeah. So hopefully this is a nice little 30,000 foot view of the social security system. You know, definitely touching on the topic for this year of social security benefits are free.

How actually that works is very important. But the biggest takeaway, hopefully that you have here is, is that it is dependent upon each and every person in each and every situation. It's the reason why we're here is the reason why we do financial planning.

It's the reason why we ask for every detail because every detail matters when you're talking about irreversible decisions. Once you turn on that social security, you know, you can't go, oops, you know, can I actually turn it back off? Those are, those are just challenges we don't want to face. So we can't stress the importance of detailed financial planning.

Keep asking us questions. Let's keep working and diving deeper into your financial plan. And we will ultimately always do our best to come up with the best filing solution for you.

So thanks again, Will. Thank you all for joining us. As always, if you have any particular questions on your situation, never hesitate to reach out and we'd be happy to assist.