What You Need to Know Before Withdrawing Social Security

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As a financial advisor, I hear a lot of questions and concerns about Social Security: 

  • “Will Social Security even be around by the time I retire?” 
  • “I worry about overestimating my Social Security income. There’s no way I’ll get that much money.”
  • “Will working a few more years significantly increase my Social Security benefits?”
  • “Will my ex-spouse find out if I collect on their Social Security benefits?” 

Questions like these are why navigating your retirement income planning can sometimes feel like a challenging hill to scale. Additionally, the modern pre-retiree is typically still relying on Social Security to round out their monthly income, which can feel even more complex.

There’s much to consider before you start withdrawing Social Security. This includes when to take your benefit, whether to take your spouse’s or ex-spouse’s benefit over your own, and even attempting to calculate how long Social Security as a program will remain viable in the future, just to name a few. (For the record, Social Security does not notify an ex-spouse if you apply for a benefit using their income history.) 

Understanding how to integrate Social Security into your retirement plan can bring clarity to your long-term goals. This overview of what to consider before withdrawing covers some basics of Social Security, examines the tax implications of withdrawals, and explores the potential long-term financial considerations so you can ultimately find more clarity around your Social Security benefits and make the most informed decisions.

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Understanding the Basics of Social Security

Social Security is a government program designed to provide financial assistance to retirees, disabled individuals, and survivors such as widows and widowers, divorced spouses, unmarried children, and dependent parents. It offers a regular stream of income to help cover essential expenses during retirement. 

The two most common initial questions around Social Security are, “When do I qualify for benefits?” and “How are my benefits calculated?” While important questions in their own right, the answers to each can be seen as just the start to a longer, more detailed conversation.  

When Do I Qualify for Benefits?

Retired individuals who are not considered disabled or survivors become eligible to take a reduced Social Security benefit as early as age 62. However, you are not eligible to receive full benefits until reaching Full Retirement Age (FRA). Your FRA is calculated using your birth year. In general, your FRA is between age 66 and 67 depending on when you were born, and the Social Security Administration has an easy-to-use calculator on their website to determine your benefit eligibility timeline.

The Social Security Administration created the following chart to help individuals discover how much their benefit will be reduced if they start receiving benefits from age 62 up to their full retirement age. This example is based on an estimated monthly benefit of $1000 at full retirement age.

Chart depicting the benefit eligibility timeline for social security

How are My Benefits Calculated?

To qualify for Social Security benefits, you must accumulate a certain number of work credits through employment covered by Social Security. 

Put simply, the Social Security Administration (SSA) takes the 35 years where you earned the most income and applies a formula to calculate your Primary Insurance Amount (PIA). Your PIA is based on the estimated benefit you would receive at full retirement age (65 or older, depending on your birth year). This calculation is generally a universal standard. However, your PIA might be different if you’re eligible for a government pension, or if you opt to delay taking your benefit. Note that your benefits are adjusted for cost of living once you turn 62. 

When Should I Take My Social Security Benefit?

In general, there are three different options for taking a Social Security Benefit. You can take your benefit when:

  1. You become eligible at 62. This results in a reduced monthly benefit payment. 
  2. You reach your full retirement age. Waiting until full retirement age guarantees a full estimated benefit. 
  3. You’re past full retirement age. A benefit can be delayed until age 70. Each year delayed results in a higher monthly benefit payment when you finally choose to withdraw the benefit.

Deciding when to start receiving Social Security benefits is a significant decision, one with upsides and drawbacks to each option. 

Delaying Withdrawals

Delaying Social Security withdrawals can lead to increased monthly benefits, which can provide more stable monthly cash flow later in retirement. However, delaying your benefit can also result in less cash flow when you initially retire, or even needing to continue working full- or part-time to meet your monthly financial obligations.

Early Withdrawals

If you choose to start Social Security benefits early, you’ll receive a reduced monthly benefit. The benefit amount is locked in for your lifetime, meaning this decision is permanent. However, if you need the cash flow earlier than your full retirement age, this may be your best and only option. 

Knowing What’s Best For You

Several factors might play into your decision on when to withdraw Social Security: 

  1. Personal health and longevity. If you think you may need a more robust monthly benefit to cover future personal health expenses, delaying your benefit may make sense. However, if you have larger health expenses now, getting a monthly benefit sooner may help offset costs – even if that benefit is reduced.
  2. Financial needs. Calculating your financial obligations in retirement can often feel daunting, but comparing what you’ll need versus what you have saved can help identify any gaps that a Social Security benefit can cover. If you have enough saved to cover your monthly obligations, delaying the benefit could result in a higher monthly payment later in retirement when you may need it more to cover unexpected expenses.
  3. Employment status. If you are planning to work beyond age 62, delaying benefits likely makes the most sense to increase your monthly income later on. Additionally, if you opt to delay your benefit while working, the benefit may actually be higher given you paid into Social Security for a longer period of time through your employer. If you do opt to take your benefit while still working, your benefit may be reduced if you meet the earnings limit ($21,240 if you’re younger than your FRA; $56,520 if you’re at your FRA or older). 

How Spousal Social Security Benefits Work

Spouses can be eligible for Social Security benefits based on their partner’s work record. To qualify for spousal benefits, one of the following must be true for you:

  1. You are 62 or older.
  2. You are any age, but have a child who is either under the age of 16 or is disabled.

Because this unique program can be confusing to many pre-retirees trying to plan their cash flow, here are some commonly asked questions:

What if I’m divorced? 

If you’re divorced, you may still be eligible for spousal benefits – and it wouldn’t impact your ex-spouse’s eligibility to take their own benefit. To be eligible for spousal benefits after divorce, the following must be true:

  1. You’re over age 62. 
  2. You were married to your ex-spouse for 10+ years.
  3. You aren’t remarried.

If you get remarried prior to age 62, or your marriage lasted less than 10 years, you aren’t eligible. 

What if I’m eligible for my own benefit? 

If you’ve worked and paid into Social Security, both you and your spouse may be eligible for benefits. In general, the SSA pays out your own benefit first. If your own benefit is less than what you would receive on your spouse’s record, then the SSA will pay you an additional amount to bring you up to your spouse’s value. Assuming you are at your full retirement age, your spousal benefits cannot exceed 50% of your spouse’s benefits. For example, if your own monthly benefit is $1,000/month and theirs is $3,000/month, you would be eligible to receive up to half of your spouse’s benefits ($1,500/month). In other words, you would receive:

  1. Your $1,000/month benefit.
  2. An extra $500/month in spousal benefits.

Is there a maximum benefit amount? 

Yes, there is a maximum family benefit. The total amount you and your family can receive is between 150% to 180% of your benefit amount. This is important if you have a spouse, ex-spouse, children, and/or dependent parents who would qualify to receive benefits under your record.

When Am I Eligible for Survivor Benefits?

Survivor benefits are typically available to individuals who have lost a family member or spouse who was covered by Social Security. To be eligible for survivor benefits, you must be a surviving spouse, child, or dependent parent, and the deceased worker must have been eligible for a Social Security benefit (meaning they worked and paid into Social Security throughout their career). 

Generally, surviving spouses can start receiving survivor benefits as early as age 60 (or age 50 if disabled). Surviving children can qualify if they are under the age of 18 (or up to age 19 if still in high school) or disabled. 

Additionally, dependent parents aged 62 and older may also be eligible for survivor benefits. 

How Social Security Benefits are Taxed and Can Impact Your Tax Bracket

Your Social Security benefits generally aren’t taxable. However, if you have “substantial” other income as defined by the SSA, you may be subject to income taxes on your benefit. This might include income from continued work in retirement, self-employment, interest, or dividends. You’ll only pay taxes on up to 85% of your Social Security benefits if one of the following is true:

  1. You file a tax return as an individual with income between $25,000 and $34,000.
  2. You file a joint tax return and your combined income is over $32,000.
  3. You’re married, but file a separate tax return.

Note: SSA benefits are taxed on a sliding scale, with 50% to 85% of SSA benefits taxable depending on your income.

Long-Term Financial Considerations

Social Security plays a pivotal role in a long-term financial plan, serving as a foundational element of retirement income for many Americans. It can act as a safety net, providing a stable base of income, and let you optimize other retirement assets, such as pensions, savings, and investments. 

However, many experts project that in the next 10 to 20 years, Social Security funds will be decreased – which could lead to reduced benefits. If you have a longer time horizon between now and when you retire, it’s worth staying aware of news regarding SSA funding to ensure how much benefit you’ll qualify for at the time of retirement.

How to Apply for Social Security Benefits

Luckily, applying for Social Security benefits is a relatively easy process. Once you decide you’re ready to receive your benefit, you can use the Social Security Administration’s website to apply. In general, you’ll be asked to provide the following information:

  • Social Security Number
  • Where and when you were born
  • Recent work history
  • Current and past marriage information
  • Information for direct deposit
  • Information for any qualifying children

You can also set up an appointment to apply in person if you have questions.

The Key To Social Security: Have a Plan Prior to Eligibility

Social Security is a cornerstone of retirement planning that requires careful consideration and coordination. By understanding the basics of how Social Security fits into your overall retirement plan, you can make informed decisions to help secure a more comfortable next chapter. 

At Abacus, we know every individual’s life and financial situation is unique. Finding professional guidance that honors your values and goals is often extremely helpful when tailoring your retirement plan to your specific needs. Reach out to an Abacus advisor today to see how we can help bring clarity and peace of mind to your future.


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