Social Security: 3 Key Insights You Need to Know

When planning for retirement, there are different levels of intricacy, effort, and (let’s face it) aggravation that come with each type of retirement account you may have. With a 401(k), things are usually simple—of all the plans available; it’s the most “set it and forget it” option! An IRA might take more effort, but that means you’re more likely to know how it’s been performing over the years.

Then there’s Social Security. At first, it seems like another easy option. You’ve paid into it your entire life. Now that you’ve retired, you finally get to reap those benefits. Right?

But Social Security is more intricate than you might think at first glance, and navigating it can feel like a daunting task. Fortunately, a few key insights can make navigating Social Security easier and help you maximize your benefits.

For numerous retirees in the United States, Social Security is their primary income source. Therefore, comprehending the critical elements of this complex system is indispensable for creating an effective retirement income strategy.

Today, we explore three crucial Social Security insights often neglected by prospective beneficiaries. By arming yourself with this knowledge, you can maximize your benefits and sidestep common mistakes.

Social Security: 3 Key Insights

Social Security benefits arrive every month. How much you receive for your benefit depends on several factors. These include your lifetime earnings, the age you start receiving benefits, and whether you’re eligible for a spousal benefit.

As I said above, Social Security seems simple. And it can be! You apply for benefits, and they come right to you.

But Social Security also has multifaceted rules and considerations. Understanding these can help you maximize those benefits to provide a better retirement income.

And the following insights can help you do just that:

1. The Earnings Limit

Do you know about the Social Security “earnings limit?” Many don’t! Believe it or not, the earnings limit can reduce your benefits!

If you claim your Social Security benefits before your Full Retirement Age (FRA) while still working, your benefits may be reduced if you earn beyond a specific limit. This limit fluctuates each year, so if this applies to you, make sure you check it regularly! In 2023, the Social Security earnings limit for those who haven’t yet reached their FRA is $56,520.

Crafting your retirement income strategy with a tax preparer or financial advisor can prevent an unintentional benefit reduction. Such income strategies keep withdrawal rates in check, ensuring you don’t risk running out of money in the short term or the long term.

2. Timing Applications for Social Security and Medicare

A common source of confusion among those nearing retirement lies in understanding when to apply for Social Security benefits versus when to apply for Medicare benefits. A common misconception is that postponing Social Security until age 70 means you must also wait to sign up for Medicare at the same time. However, this can become a costly mistake.

And that’s because Medicare penalizes you for applying for benefits too late.

Regardless of your plans for filing Social Security, applying for Medicare by age 65 is essential to avoid late enrollment penalties. These penalties can increase by 10% every year you fail to enroll. If you mistakenly defer Medicare enrollment, this can eventually become a significant hit to your retirement savings.

3. Maximizing Benefits for Married Couples

For married couples, planning who receives benefits and when can substantially influence the cumulative benefits accrued throughout their lifetimes. Each year you delay receiving benefits beyond your FRA, your benefits can increase by up to 8%.

Couples can use a tactic to synchronize benefits to optimize their total payout. One spouse might postpone receiving benefits until age 70 (allowing the benefit amount to grow by up to 8% each year for several years), while the other claims earlier.

Don’t Forget: Other Sources of Income

When planning for retirement, it’s essential to consider other income streams beyond Social Security. For one, Social Security benefits are often much lower than many other retirement plans.

Depending on interest rates, investments such as stocks, bonds, and mutual funds can offer good returns to help supplement your retirement income. A balanced retirement portfolio generates income over time and, with careful planning, can increase the total return from your investments.

Of course, other retirement plans like a 401(k) or IRA use those investment vehicles to build wealth slowly over time and create a liveable retirement income.

Insurance companies can also offer annuities. These financial products provide a steady income stream for a set period (or for life, depending on your investment strategy) and can add another layer to your retirement income plan.

Tax Efficiency and Social Security Disability

While we’ve discussed the aspects related to retirement, it’s essential to understand the role of tax efficiency in your income strategy. Your Social Security benefits, investment portfolio, and even Social Security Disability can all have tax implications. They each come with their own rules and tax burdens. Understanding these can help you create more accurate retirement budgets, so you can more clearly understand how much money you’ll need for a comfortable retirement.