Retirement Planning: Claiming Social Security Benefits


In our most recent blog post, we discussed the import role that Social Security benefits play in the retirement income plan of most Americans, and provided a framework for understanding the various types of benefits. While sometimes dismissed as inconsequential, Social Security benefits provide a critical source of guaranteed income for most retirees. To wit, Social Security benefits comprise over fifty percent of the retirement income for two-thirds of current retirees and, critically, allow many seniors to live independently. In this blog post, we review how Social Security benefits are taxed and provide guidance on how and when to claim benefits. We encourage readers to review our previous blog post, A Primer on Social Security Benefits, as it provides important information that will aid in your understanding of the strategies outlined below. You can find that blog entry by clicking here.

To begin, an understanding of Social Security retirement benefits requires reviewing a few common terms that are key to making informed claiming decisions.

  • Primary Insurance Amount (PIA): the amount paid to a retiree when they attain their Full Retirement Age, as defined below. Ten years of credited work are required to qualify for retired worker’s benefits.
  • Full Retirement Age (FRA): based on your year of birth, this is the age that you are eligible to receive Social Security retired worker’s benefits equal to your PIA. Reduced benefits may be claimed earlier, and retired worker’s benefits may earn deferral credits for delayed claiming. As a reminder, benefits collected prior to FRA are reduced by $1 for every $2 of earnings that exceed the Social Security Earning Limit. Please see our previous blog post for a complete discussion on these topics.

Year of Birth                                                             Full Retirement Age

1943-1954 66 years
1955-1959 Add two months per year
1960 and later 67 years

Taxation of Benefits:

Social Security retirement benefits fall into one of three categories as it relates to taxation: (1) not taxable; (2) tax applied to 50% of benefits, and; (3) tax applied to 85% of benefits. The tax is based on provisional income and is applied based on attaining the graduated earnings thresholds below.

Percentage of Social Security Benefits Taxed Single Married Filing Jointly
0% $0- $24,999 $0- $31,999
Up to 50% $25,000- $34,000 $32,000- $44,000
Up to 85% Above $34,000 Above $44,000
Excess of threshold does not trigger all benefits to be taxed at a higher rate.

The definition of provisional income may be unfamiliar to many. It is the sum of wages, taxable and nontaxable interest, dividends, pensions, self-employment and other taxable income plus fifty percent of your annual Social Security benefits. It is important to note that while municipal bond interest is included in provisional income, Roth IRA distributions are not. Thus, Roth IRAs offer an additional benefit to higher-income retirees that wish to minimize their provisional income.

As an example, a single individual with $40,000 of taxable traditional IRA distributions (no post-tax contributions), $20,000 of pension income, $5,000 of taxable dividends, $10,000 of municipal bond interest and $25,000 of annual Social Security benefits would compute their provisional income as follows:

Taxable IRA Distributions:                                                    $40,000
Plus: pension income                                                              $20,000
Plus: taxable dividends                                                           $5,000
Plus: tax-exempt interest                                                       $10,000
Plus: 50% of annual Social Security benefits                     $12,500
Total Provisional Income                                                       $87,500

Claiming Benefits:

Social Security claiming strategies are complex and may involve the integration of several types of benefits. In making an informed claiming decision, it is important to have an understanding of the types of benefits that you may be eligible for and how the decision impacts your retirement income plan. It is also important to remember that claiming Social Security benefits should be made independently of when to collect other retirement benefits.

As previously noted, when to begin collecting benefits is a complex decision. Individuals  have often approached the decision using the relatively simple idea of targeting a cross over or break-even age. This analysis tells us the age we would have to attain in order for deferring the collection of benefits to become advantageous.

While this type of analysis can be useful for conceptual purposes, and may be appropriate for very high net worth individuals that rely minimally on the benefits, it ignores the value of higher income later in retirement, whether that is paid to the worker or their surviving spouse.

Break-even points for Social Security Benefits

Age 62 versus 66 Age 78
Age 66 versus 70 Age 82.5
Age 62 versus 70 Age 80.5
Source: “Today’s Low Interest Rate Environment and Social Security Claiming Decisions” Reichenstein and Meyer {2012}.
Note: The exhibit assumes a Full Retirement Age of 66 years.

A more favorable approach will consider the retirement income needs of the individual or family, the relative importance of  Social Security income in relation to  other assets or sources of income, and the value of higher levels of guaranteed income during advanced years. These considerations will often favor the deferral of Social Security worker’s benefits, especially for those with fewer alternative sources of income. Indeed, delayed claiming can have a dramatic impact on the retirement readiness of  those workers that are least prepared for retirement, but is often overlooked or dismissed.

Strategies for Single Clients:

Meet Bill. He is 65 years of age and would like to retire. Bill has a retirement plan valued at $1,000,000 but no pension. His Social Security primary insurance amount is $2,000 per month and he expects to live to normal life expectancy.

In this case, Bill should consider deferring his worker’s benefits until age 70.  Assuming an average increase in benefits of 2.5% per year, he would receive $642,734 in benefits over his lifetime, versus $589,072 if he claimed at full retirement age. More importantly, Bill has ensured that he will have the highest possible inflation-adjusted income should he live to an advanced age. He is fortunate to have a large retirement portfolio, as it affords him the option to defer benefits. Those with fewer resources may have a more limited set of options available.

The strategy of deferring benefits could change if Bill were very wealthy and did not expect to rely on the benefits. In this case, he might use a break-even analysis and claim benefits based on his remaining life expectancy of approximately 18 years. If, instead, Bill were diagnosed with a terminal illness, he should begin collecting benefits immediately since he has no spouse to survive  him.

Strategies for Divorced Clients:

Let’s stay with Bill, but assume that he had been married to Jane for a total of fifteen years and was divorced five years ago. Bill has not remarried. Jane worked outside of the home and qualifies for Social Security worker’s benefits on her earnings. She is 64 years of age and has a PIA of $1,800 per month.

This time, Bill should consider making a restricted filing for divorced spouse benefits when he attains his full retirement age. He will then switch to his own worker’s benefits at age 70. Instead of $642,734 in benefits received as a single individual, Bill would receive cumulative benefits totaling $688,702. The additional spousal benefit amount will also make deferring his own benefits  less burdensome.

Bill’s collection of benefits has no impact on Jane’s benefits- assuming that she too has not remarried, she may avail herself to the same strategy, nor does it require permission or cooperation from the former spouse. The treatment of spousal benefits for divorced spouses is different from that of married spouses in that, unlike married spouses, divorced spouses may simultaneously collect spousal benefits based on the earnings of their former spouse.

Strategies for Married Clients:

Married clients are generally presented with more options for claiming benefits, especially in cases where both spouses are of similar age and have a similar history of earnings.

Staying with Bill and Jane, but assuming that they are married and each expects to live until their respective normal life expectancy, Bill should consider filing for his Social Security worker’s benefits at his full retirement age and immediately suspend payment of those benefits. This allows Bill to continue to earn deferred credits on his own benefits, and allows Jane to file a restricted application for spousal benefits based on Bill’s PIA. Both spouses will continue to defer their Social Security worker’s benefits until age 70, thus maximizing their respective benefits. Assuming that Bill dies before Jane, Social Security benefits paid to Jane are based on a calculation that includes her worker’s benefit and the survivor benefit based on Bill’s PIA, along with any deferral credits earned by Bill.

What if Jane did not work outside of the home, or had very low earnings? In the case where Jane did not work outside of the home, Bill’s strategy is identical to the one outlined directly above. Bill’s goal is to defer his own worker’s benefits so that he collects the highest amount possible and maximizes Jane’s survivor benefits.  Jane would file for her own benefits at her full retirement age, which are comprised solely of  Social Security spousal benefits since she does not qualify for retired worker’s benefits.  She would continue to collect spousal benefits, and would switch to survivor benefits if Bill predeceases her.

In the case where Jane’s earnings were low, but she qualifies for Social Security worker’s benefits. Bill’s strategy is identical to those detailed above, but Jane would file for her own benefits at her full retirement age. She will receive a combination of her Social Security worker and spousal benefits. A computer software program can be helpful in this scenario, as it quickly calculates the various benefits at different ages, and will help identify cases where filing for benefits prior to full retirement age should be considered. One such case might be if Jane were significantly younger than Bill and had a much lower PIA. As Jane would likely collect survivor benefits at a relatively young age, she might consider claiming her worker’s benefits and spousal benefits prior to her full retirement age despite the reduction in both benefits.

As you can see, Social Security claiming strategies can be relatively straightforward or extremely intricate. Navigating the options and how they impact your retirement income plan, asset allocation and tax planning can add additional layers of complexity. In our next blog post, we’ll discuss the impact that deferring Social Security benefits has on retirement assets and whether it always makes sense to wait. Hint: it often does, but that is not always the case.

Please consider us a resource for any questions you might have; we welcome your feedback and content suggestions for future blog posts.

John Male, CFP®
The Gassman Financial Group
G&G Planning Concepts, Inc.
The Retirement Maven ™
9 East 40th Street, Suite 1500
New York, NY 10016
Tel: 212-221-7067 Ext. 17
Fax: 585-625-0830


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s