For many Americans, Social Security is a crucial component of retirement. The problem, however, is that there is a lot that people don't know about Social Security and a lot of inaccurate information about it. And for those unwilling or unable to put in the time and do the work, the Social Security Administration (SSA) offers little-to-no guidance or assistance.

To be fair, the SSA is busy administering benefits to about 64 million Americans, including retirees, children, widows, and widowers. It’s a complicated program with lots of moving parts. And Social Security representatives are not able—or permitted—to offer advice on how to maximize benefits. That’s where financial planning services can make a significant difference, helping you navigate the complexity of your options.

Even more so, wealth planners can help you understand strategies to make the most of your Social Security benefits as you approach retirement. Here are four of them:

1. Full Retirement Age (FRA) May Not Be the Best Time to Start Taking Benefits

It’s often assumed that FRA (age 66 or 67, depending on when you were born) is when you should start taking your Social Security benefit. After all, it’s called full retirement age for a reason. You’ve reached the finish line and can retire with nary a care in the world.

However, in the eyes of the SSA, FRA means that you can receive the full Social Security benefit. While this might seem like a swell deal, if you can, it might be better to wait until you’re 70 to start drawing benefits.

The reason is simple: more money.

Let's look at a hypothetical example illustrated in figure one. Assume that your FRA is 66; your full benefit would be $1,000 per month. If you start benefits early at age 62, you'll receive 75% of your total benefit amount, or $750 in our example, for the rest of your life. And each year you delay claiming Social Security benefits, your benefit amount increases by 8%. If you wait to take Social Security benefits until you are 70, you'll receive 132% of your total benefit amount, or $1,320 a month, for the rest of your life.

As with most choices, when to claim your Social Security retirement benefit comes with a trade-off. If you take your help earlier, you'll receive benefits for longer but at a reduced amount. On the flip side, the longer you wait, the higher your benefit amount, but you’ll receive fewer payments over your lifetime.

Figure 1. Early vs. Late Social Security Benefit Election

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Source: Social Security Administration. Assumes birth 1943-1954 with hypothetical $1000/month FRA benefit.

Of course, waiting until age 70 (or even FRA) to start drawing benefits may not make sense for you and your specific circumstances. Everyone has their reasons why they may need to start drawing benefits at FRA or earlier, so it is important to discuss your options with your financial advisor before you elect to start drawing from Social Security.

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2. Your Break-Even Age Can Help You Decide When to Start Drawing

Something that can help you decide when to start claiming your benefits is your “break-even” age. The "break-even" age is the age at which you come out ahead if you opt to delay receiving your benefits. Your break-even age will shift depending on the amount of your FRA benefits and the age at which you begin receiving Social Security.

If you’re relatively healthy and have a history of longevity in your family, there’s a greater likelihood that you’ll reach your break-even age. Figure 2 illustrates this concept for a hypothetical person with a life expectancy of 92 and an FRA of 66. In this case, delaying the benefits until FRA instead of taking them at age 62 puts their break-even age around 75 and increases their lifetime benefits by over $100,000. Delaying even further to age 70 puts their break-even age around 79 and increases their lifetime benefits by over $200,000.

Figure 2. How Delaying Drawing Benefits Impacts the Break-Even Age

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Source: Social Security Administration. Estimates are shown in today's dollars and based on assumptions for someone born 1/1/1949 earning the Social Security wage base maximum since 1976 or earlier. No cost-of-living adjustments, inflation estimates or reinvestment rates are included.

This can also be useful for married couples seeking help developing a claiming strategy. Let's say you're the higher earner, so you're entitled to a greater benefit, but you don’t think you’ll make it to age 80, so you want to start drawing benefits at FRA—or even earlier. However, your wife’s family is all going strong into their 90s, and you think she will, too. If you believe your spouse will outlive you, her longevity should be considered, as she will inherit the higher two benefits. This means that while your break-even age may not make sense for you, it may make sense for her. So, you might decide to claim your wife’s benefits early (even though it will be a lower amount) and delay your benefits so they can continue to grow.

This kind of analysis can be complicated and, of course, your other sources of retirement income need to be considered. Working with an advisor specializing in retirement income planning can help you understand your options and make the best choice.

3. Creating a Slush Fund Can Help You Delay Drawing Benefits

If you’re able, setting aside some money to live off for a few years can help you delay taking your benefits until you turn 70.

Let’s look at a hypothetical example based on Figure 1 above. If you start drawing your benefit at age 66, you’ll receive $1,000 a month. But if you wait four years until you turn 70, you’ll receive $1,320 a month—and that extra monthly income could turn into tens of thousands of dollars down the road.

But before you get there, you need to get to age 70, which means you have $48,000 in would-be Social Security payments you need to account for ($1,000 a month x 12 months x 4 years). Maybe that comes from severance or paid leave payout, is saved along the way, or comes from the sale of a property. Wherever that money comes from, it can help delay you from drawing benefits until you're eligible to receive the maximum amount.

4. The Federal Government Can Tax Social Security Benefits—And So Can Some States

Most people don't know this, but the federal government can tax your Social Security benefits. Whether or not your Social Security will be taxed is based on “combined income.”

You add your gross income, tax-exempt interest, and half of your Social Security benefits to determine your combined income. Then, depending on your tax-filing status, you have to pay federal income taxes on your Social Security benefits if your combined income exceeds a certain level.

What’s more, depending on where you live, your Social Security may even be taxed at the state level. Currently, 12 states also tax some or all of their residents’ Social Security benefits. This can make determining where you live in retirement a problematic (or easy) decision. If you’re looking at a handful of states you want to move to in retirement or think it may just be easier to stay put, check to make sure those states don’t tax Social Security benefits. If they don’t, that’s more money in your pocket.

What’s the Best Way to Maximize Social Security Benefits?

When and how to start drawing Social Security benefits depends on your financial goals and unique circumstances. The advantages of waiting until age 70 are clear, but that might not be what’s best for your situation.

To find out how to maximize your Social Security benefits and develop a strategy that's right for you, reach out to a financial advisor today.

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