Your Social Security Decision is Really an Income Decision

One of the most common questions people ask as they approach retirement sounds simple:

When should I claim Social Security?

At 62? At full retirement age? Wait until 70?

Those are important choices. But they may not be the most important question.

A better place to start is:

What job does Social Security need to do in your retirement income plan?

For many retirees, Social Security isn’t simply another benefit to maximize. It is the foundation of the retirement paycheck. It provides income for life, receives cost-of-living adjustments when applicable, and for married couples may help determine the income available to a surviving spouse.

That means your claiming decision isn’t only about when you receive your first check.

It’s an income decision. And for married couples, it may also be a survivor-income decision.

Social Security Is Part of Your Income Floor

Retirement changes the job your money has to do.

During your working years, a paycheck arrives because you worked. In retirement, that paycheck has to be replaced from several possible sources.

Social Security is often one of the most important.

If you have a pension, that may provide another source of lifetime income. If Social Security and pension income don’t cover your essential expenses, you may need portfolio withdrawals or another source of guaranteed income to fill the gap.

Together, the reliable income sources supporting essential expenses form your retirement income floor. I’ve written before about why building a retirement income floor comes before anything else in the plan, and Social Security usually sits right at the center of it.

That’s why Social Security shouldn’t sit off to the side of the retirement plan as a separate decision. It is part of the income structure supporting everything else.

And once you look at Social Security that way, the claiming decision starts to look different.

Claiming Earlier or Later Changes the Income

Social Security retirement benefits can generally begin as early as age 62. Starting early, however, means accepting a permanently reduced monthly retirement benefit compared with waiting until full retirement age.

For someone born in 1960 or later, full retirement age is 67. Claiming at 62 can reduce the worker’s retirement benefit by as much as 30%.

Waiting beyond full retirement age works in the other direction. For people born in 1943 or later, delayed retirement credits increase the retirement benefit by 8% per year until age 70. There is no additional increase for delaying beyond 70.

So there is a real tradeoff: receive a smaller check for more years, or wait for a larger monthly income later.

Much of the Social Security conversation focuses on calculating a “break-even age,” the point at which the additional income from waiting catches up with the benefits you gave up by not claiming earlier.

That’s useful information.

But it isn’t the whole decision.

The Goal Isn’t Necessarily the Biggest Social Security Check

There is no universal rule that everyone should wait until 70.

Someone who needs income now may face a very different decision from someone who can comfortably draw income from other sources while waiting.

Health and longevity expectations matter. Whether you’re still working can matter. Taxes, pensions, other retirement assets and the amount of guaranteed income already available to the household can all matter.

And for married couples, the needs of two people matter.

That’s why the better question isn’t simply:

“How do I maximize my Social Security benefit?”

It is:

“How should Social Security fit into our retirement income plan?”

Sometimes those questions produce the same answer.

Sometimes they don’t.

Married Couples Are Planning for Two Lives

A married couple isn’t necessarily making two completely independent claiming decisions.

Suppose one spouse earned substantially more during his or her career and therefore has the larger Social Security retirement benefit.

While both spouses are alive, the household may have two Social Security payments coming in.

But a retirement income plan shouldn’t stop with the years when both spouses are alive.

Eventually, one spouse is likely to outlive the other.

What happens to the income then?

Two Social Security Checks Can Become One

This is one of the most important retirement-income realities for married couples to understand.

When one spouse dies, the surviving spouse doesn’t simply continue receiving both Social Security benefits in full.

Depending on eligibility and claiming circumstances, the survivor may receive a survivor benefit based on the deceased spouse’s record or continue receiving a benefit based on his or her own record. When someone qualifies for both, the payments generally aren’t added together. The total benefit is generally based on the higher applicable amount.

Think about what that can mean for the household.

While both spouses are alive:

Social Security benefit + Social Security benefit

After one spouse dies:

One applicable Social Security benefit

An income stream can disappear.

But the household’s expenses don’t necessarily fall by the same amount.

The mortgage or property taxes don’t suddenly get cut in half. Neither do utilities, home maintenance or many other household expenses. A car may still be necessary. Insurance still has to be paid.

Some expenses decline. Others barely change.

The household has changed.

So has the income plan.

The Higher Earner’s Claiming Decision May Affect Two People

This is why the higher earner’s Social Security decision deserves special attention.

Delayed retirement credits can increase a worker’s own retirement benefit. Those delayed retirement credits can also be reflected in the benefit calculated for a surviving spouse.

That creates an important planning consideration.

Waiting to claim the higher earner’s benefit isn’t necessarily just about giving that person a larger check later.

It may also increase the Social Security income available to the surviving spouse.

Now consider a couple looking only at the higher earner’s individual break-even calculation.

They might conclude:

“Why wait? Take the money now.”

But the higher earner may die first. The surviving spouse may live another five, ten, fifteen or twenty years. And the larger Social Security benefit may become an important part of that survivor’s income floor.

The decision is no longer just about how much one person collects during one lifetime.

It is about the income security of the household across two lifetimes.

Spousal Benefits and Survivor Benefits Are Not the Same Thing

This distinction matters because the two are easily confused.

A spousal benefit may be available while both spouses are living. At full retirement age, the maximum spousal benefit can generally be as much as 50% of the worker’s full-retirement-age benefit, subject to eligibility and other Social Security rules.

Delayed retirement credits earned by the worker do not increase that maximum spousal benefit.

A survivor benefit is different.

When calculating a qualifying surviving spouse’s benefit, Social Security can take the deceased worker’s delayed retirement credits into account.

That is why the higher earner’s claiming decision can have consequences beyond the higher earner.

A decision made while both spouses are alive may affect the income available after one spouse is gone.

Social Security Shouldn’t Be Optimized in Isolation

Social Security doesn’t exist in its own box.

If you delay claiming, where will your income come from while you wait?

Will you continue working? Draw from cash? Take withdrawals from an IRA or 401(k)? Use pension income? Do you have another source of guaranteed lifetime income?

Could the years before Social Security begins create tax-planning opportunities? Could withdrawals or other income affect Medicare premiums? What happens if the market falls during the years you’re using investments to bridge the income gap?

There isn’t one correct answer for every household.

But there should be one coordinated answer for your household.

That’s the difference between simply choosing a Social Security claiming age and building a retirement income strategy.

Social Security Is One Piece of the Retirement Paycheck

This is also why retirement income planning crosses professional disciplines.

Your Social Security decision can interact with investment withdrawals, pension elections, annuity income, taxes, Roth conversions, Medicare premiums, required minimum distributions, estate and beneficiary planning, long-term care considerations and the income needs of a surviving spouse.

No single product solves all of those issues.

And no single professional necessarily handles all of them.

Your investment adviser may manage your portfolio. Your CPA may help you understand tax consequences. Your attorney may handle estate documents. An insurance-licensed retirement income specialist may help evaluate guaranteed-income and protection strategies.

The important thing is that the pieces work together.

Structure follows objectives. Products follow structure.

Social Security belongs inside that structure.

Before You File, Ask One More Question

There are plenty of Social Security calculators that can compare claiming at 62, full retirement age or 70.

Those numbers matter.

But before making the decision, married couples should ask another question:

If either one of us dies first, what happens to the other person’s income?

Run the retirement income plan with both spouses alive.

Then look at it again with one spouse gone.

Which Social Security benefit remains? What happens to pension income? Which expenses remain? What other income sources are available? Is there still enough reliable income to support the surviving spouse?

That exercise may tell you more about the strength of the retirement plan than a break-even calculation alone. It also raises a larger question that deserves its own conversation: what actually changes, financially, when one spouse dies and the household income has to be rebuilt around one life instead of two. That is a subject I’ll take up on its own.

The Claiming Decision Is Really an Income Decision

Social Security claiming is often presented as a choice between three ages:

62.

Full retirement age.

70.

But retirement isn’t lived on a spreadsheet, and the goal isn’t simply to win a mathematical contest over who collects the most from Social Security.

The goal is to create an income structure that supports the life you’re planning to live.

For a married couple, that structure should work while both spouses are alive.

And it should still work when only one is left.

So before asking:

“When should I claim Social Security?”

Ask:

“What does our retirement income plan need Social Security to do?”

And then ask the question too many couples never get around to:

“What happens to the plan when one of us is gone?”

That’s where Social Security claiming stops being an age decision and becomes what it really is:  A retirement income decision.

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Social Security rules and individual circumstances vary, and this article is educational and not a recommendation to claim at any particular age. Any claiming decision should be evaluated in the context of your household’s complete retirement income picture. 

Kurtz Lytle