Social Security’s Role in Income Planning for Retirement

By Stephen V. Kenney, CFA, CFP
Gray Private Wealth, LLC

Nearly 70 million Americans receive Social Security benefits as of 2024, making it one of the most significant social insurance programs in the United States. An estimated 11,000 Americans will reach age 65 daily through 2027, reflecting the ongoing retirement of the Baby Boomer generation. For many of those retiring, Social Security likely represents a significant source of income.

Determining when those benefits should begin is one of the most important planning decisions a retiree will make.  The financial impact of timing Social Security benefits is substantial. According to the Social Security Administration, if a person begins receiving benefits at age 62 instead of their full retirement age (FRA), their monthly benefit amount could be reduced by as much as 30%. Conversely, delaying benefits past FRA can increase monthly payments by 8% per year until age 70, potentially resulting in a 32% higher monthly benefit compared to FRA.

There is no “one size fits all” when it comes to deciding when to access Social Security benefits. But the date on which the choice to receive benefits is made will determine the base on which benefits are paid over the rest of a recipient’s life. For that reason, it is critical to take the time in advance of a planned retirement to understand the options and implications of receiving Social Security benefits at different ages. 

Social Security benefits typically are calculated based on “credits” earned during working years to arrive at an estimated benefit amount that becomes available at full retirement age. In 2024, workers earn one credit for each $1,730 in covered earnings, up to a maximum of four credits per year. Generally, 40 credits (10 years of work) are needed to qualify for retirement benefits. A recipient’s full retirement age will range from 65 to 67, depending upon birth year. But a recipient has the option to elect to receive an eligible benefit at age 62 (or younger if disabled), or as late as at age 70.  As a rule, the monthly benefit amount will be higher the longer a recipient waits to begin receiving benefits.

The complex rules surrounding Social Security benefits result from the federal government’s objective to provide an array of choices to eligible recipients based on individual circumstances. To guide recipients looking to make an informed decision about Social Security benefits, the Social Security Administration suggests consideration of the following:

• Will the recipient continue to work while receiving benefits? Depending on the age at which benefits are first received, additional income may be limited or run the risk of losing a portion of benefits.
• Will there be other income sources? Similarly, income from pensions or 401(k)s can reduce Social Security benefits if you first receive benefits prior to your FRA.
• What is the recipient’s estimated life expectancy? How long will you need your money to last? If health problems or family history are indicative of a shorter life span, you may wish to access benefits at an earlier age.
• How might retirement affect health insurance coverage? Medicare eligibility begins at age 65, regardless of when Social Security benefits commence. Those who retire before 65 need to carefully plan for health insurance coverage during the gap period, as COBRA coverage typically lasts only 18 months and can be expensive.
• Is the recipient eligible for benefits on another individual’s record? A spouse can receive up to 50% of their partner’s full retirement benefit amount if they wait until their own full retirement age. This can be particularly valuable for couples where one spouse had significantly lower lifetime earnings or spent time out of the workforce.
• Are other family members eligible to receive benefits based on an individual’s record? Children of retirees can receive benefits if they are under age 18 (or up to 19 if still in high school) or disabled before age 22. Additionally, ex-spouses may qualify for benefits based on their former spouse’s record if certain conditions are met.

There are many resources available to assist in making a decision on receiving Social Security benefits. The Social Security Administration maintains individual earnings records on every participant in the Social Security system. It also has planning tools to assist in making the decision on when to begin receiving benefits. To review estimates of benefit amounts and access the planning tools, visit the Social Security Administration website.

Planning for retirement involves many financial decisions. Taking the time now to review your options for Social Security benefits is an important step towards preparing to fund your post-retirement years.