The Essential Guide to Social Security Benefits and Retirement Planning

Article by: Montecito Capital Management, Santa Barbara Financial Advisory Firm

SOCIAL SECURITY, a fundamental feature of retirement planning, is the only government guarantee of a sufficient, permanently assured income. Benefits are determined by the average of the 35 highest years of salary in relation to the indexing of the year of our birth. The PIA is the basis of the benefits, which are fixed at the FRA, which varies from year to year; they can be drawn from age 62, which reduces the benefits permanently, or they can be postponed until age 70, thus increasing them by eight per cent per month for each year of delay over the FRA. While it may seem simple to draw the benefits, to do so right is a matter of complex strategy, adapted to the personal circumstances.

For the lower-earning spouse, the social security may reach up to 50% of the higher-earning spouse’s PIA, at full retirement age, but as early as 62, this amount is reduced to only 32.5 . If the lower-earning spouse’s PIA is less than half that of the higher-earner, she may take hers early for immediate cash flow, while the higher-earner delays to age 70 to increase the cumulative benefit and survivor benefits. It is also important to coordinate with tax planning, because Social Security is taxable up to 85% if it is received after RMDs.

Apart from this situation, which can be pretty well tailored to suit the individual, divorced individuals who were married for ten years and remain unmarried can take their ex-spouse’s benefits, if the ex-spouse is over 62 years old, without affecting their ex-spouse. Also, divorced individuals are perfectly entitled to claim both on the ex-spouse’s and on their own records, at different times, thus allowing them to claim early on their ex-spouse’s benefit and later claim on their own higher benefit.

Subsequently, a form of aid was provided to the surviving spouses, where the older survivors obtained the higher of their own or the deceased’s benefit, which makes it profitable for higher earners to wait until 70. The younger survivors receive a reduced benefit, from age 60, of 71.5 percent of the PIA, and there are special provisions for those who care for children under 16; marriage before the age of 60 generally forfeits survivor benefits; marriage after 60 preserves them.

Higher earnings couple: by waiting for ten years, the higher earnings partner can earn more, i.e. delaying until the age of 70, while the lower one takes it earlier. This process increases the monthly benefit of the higher income, increases income for life, as well as survivor benefits in case the higher income dies first. The rule thus increases the joint survivor benefit in case of the first death, and meanwhile provides income for the earliest claimer, thanks to the receipt of the lower income.

Strategically delaying retirement benefits while working, one can build up the delayed retirement credit. Earnings limits apply to benefits that are claimed before FRA; in 2025, the annual threshold is $23,400, and earnings over this limit reduce benefits by $1 for every $2 over. The limit rises to $ 62,060, in the year the FRA is reached, whereupon benefits are withheld at the rate of $1 for every $3 of earnings over the limit; after reaching FRA, all benefits are withheld.

The age of retirement, Medicare, integration with other retirement assets, and the inflation index make up a personal strategy of social security. The risk of living longer in the family, claiming at age 65, Medicare enrollment, the integration of other retirement accounts, and the effect of the cost of living allowances determine the strategies of social security.

Social Security is a complex, adjustable income source which profoundly affects retirement security and lifestyle choice. Optimal strategies depend on individual circumstances such as marital status, health, income needs, and goals. Errors have far-reaching financial consequences, so proper planning and professional guidance are essential to optimize this income source. This multifaceted approach maximizes benefits, reduces taxes, and integrates payouts.