Social Security cards laying on top of American twenty dollar bills

When it comes to retirement planning, Social Security is a critical income stream that often serves as the foundation for many retirees' financial well-being. Much like creating a treatment plan for a patient, your Social Security strategy needs to be carefully coordinated with other elements of your financial life to achieve the best outcome.

This blog will walk you through how to maximize your benefits, including spousal options, how working affects your Social Security, and how to incorporate it all into a broader retirement income plan. With the right strategy, you can ensure your Social Security works as efficiently as possible, whether you claim early or late, and whether you continue working or transition fully into retirement.

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1. Understanding When to Claim Social Security: The Age Matters

Social Security offers flexibility in when you can start receiving benefits. The timing of your claim has a big impact on how much you’ll receive for the rest of your life.

1. Early Claiming (Age 62): The earliest you can start collecting Social Security.

Benefit: Income starts flowing sooner.

Drawback: Monthly benefits are permanently reduced by about 25-30% if you claim before your full retirement age (FRA).

When it makes sense: If you have a shorter life expectancy or need income immediately, this can be the right choice.

Full Retirement Age aka FRA (66-67, depending on your birth year): Claiming at your FRA means you’ll receive 100% of your benefit based on your earnings history.

Delayed Retirement (Age 70): For every year you delay past FRA, your benefit increases by 8% annually up to age 70.

When it makes sense: If you are healthy and have other income sources, delaying Social Security provides a larger monthly income for the rest of your life.

Key Takeaway: If you want to maximize your benefit and can afford to wait, delaying until 70 offers the highest payout. However, if you need income sooner or have health concerns, claiming earlier might make more sense.

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2. Optimizing Spousal Benefits: Don’t Leave Money on the Table

Spousal benefits can be a powerful way to boost household income in retirement. Here’s how it works:

• Eligibility: The lower-earning spouse can receive up to 50% of the higher-earning spouse’s benefit if claimed at FRA.

• Claiming Early: If the spouse claims before FRA, their spousal benefit will be reduced.

• Both Spouses Delaying: Even if the lower-earning spouse delays their own benefit, spousal benefits max out at FRA—delaying past FRA won’t increase the spousal benefit.

• Widow(er) Benefits: A surviving spouse can switch to 100% of the deceased spouse’s benefit if it’s higher than their own.

Example:
If your spouse's benefit is $3,000 at their FRA and you are eligible for a spousal benefit, you could receive up to $1,500. If your own benefit is smaller than that amount, it makes sense to claim the higher spousal benefit.

Strategy Tip: Coordinating when each spouse claims benefits can maximize household income. For example, the lower-earning spouse may claim their benefit early, while the higher-earning spouse delays until age 70 to lock in the highest possible payout.

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3. Integrating Social Security into a Comprehensive Income Plan

Just as doctors treat the whole patient—not just the symptoms—you need a plan that integrates Social Security into your broader financial picture. The key is to ensure Social Security works harmoniously with other income streams, such as pensions, 403(b)s, or IRAs.

Scenario 1: If You Continue Working After Claiming Social Security

If you plan to keep working after starting Social Security, it’s essential to understand how earning income impacts your benefits:

• Before Full Retirement Age: If you claim Social Security and work, your benefits could be reduced if your earnings exceed the annual limit ($21,240 in 2024). For every $2 you earn above the limit, $1 is temporarily withheld from your benefits.

• The Year You Reach FRA: The income limit increases significantly ($56,520 in 2024), and only $1 is withheld for every $3 earned above the limit.

• After FRA: Once you reach full retirement age, there’s no reduction in benefits, no matter how much you earn.

Planning Tip: If you plan to keep working, it may make sense to delay Social Security to avoid penalties and maximize your future benefits. Alternatively, you could claim early and accept reduced benefits if you need the cash flow.

Scenario 2: If You Fully Retire After Claiming Social Security

For those fully retiring, the goal is to create a steady, sustainable income stream. Social Security will play a major role, but coordinating withdrawals from other accounts is essential to minimize taxes and ensure your savings last.

INCOME PLANNING FOR RETIREES:

• Rebalancing Your Portfolio:
  Incorporate Social Security as a fixed income source in your overall asset allocation. With Social Security acting like a bond, you may be able to take on more growth-oriented investments in your other accounts.

• Sequence of Withdrawals:

  Instead of a one-size-fits-all approach, consider a coordinated withdrawal strategy. Balancing distributions from taxable, tax-deferred (like IRAs and 401(k)s), and even tax-free accounts can help you maintain your desired tax bracket, optimize Social Security taxation, and make your retirement savings last longer. A tailored plan ensures that each dollar works smarter for your overall financial health.

• Minimize Social Security Taxes:

  Up to 85% of your Social Security benefits can be taxed if your combined income (Social Security + other income) exceeds certain thresholds. Instead of relying on Roth IRA withdrawals early in retirement, consider implementing a Roth conversion strategy during years of low or no income—often before Social Security benefits begin or while delaying them until age 70. This approach allows you to move assets from tax-deferred accounts to a Roth IRA at lower tax rates, potentially reducing your taxable income later in retirement and minimizing the impact on your Social Security benefits.

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4. Social Security in the Context of Longevity and Inflation

While Social Security provides a reliable income stream, it’s important to think about the long-term risks you may face in retirement—especially longevity risk and inflation.

• Longevity Risk: If you live well into your 90s, delaying Social Security can help make sure you have a higher income stream later in retirement and preserve your savings. Example: A retiree who claims at 70 will receive a larger monthly check that will continue to grow with inflation over the years.

• Inflation Protection: Social Security benefits include Cost of Living Adjustments (COLAs). In high-inflation environments, these COLAs help maintain your purchasing power. While COLAs may not keep up with every expense, they offer more protection than many fixed-income sources.

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5. Putting It All Together: A Holistic Approach to Retirement Income

Here’s how to pull all these pieces together into a cohesive Social Security and retirement income plan:

1. Evaluate Your Health and Longevity Prospects: If you expect to live a long life, delaying benefits makes more sense. If health concerns arise, early claiming may be better.

2. Coordinate with Your Spouse: Decide when each spouse should claim benefits to maximize total household income.

3. Plan Around Your Work Status: If you continue working, consider delaying Social Security to avoid reductions and taxes.

4. Incorporate Social Security with Other Income Sources: Use a tax-efficient withdrawal strategy to balance Social Security with pensions, investments, and other savings.

5. Account for Inflation and Longevity Risk: Ensure your plan remains flexible to account for rising costs and a potentially long retirement.

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Conclusion: Social Security as Part of Your Retirement Treatment Plan

Planning for Social Security is like creating a well-thought-out treatment plan—it requires understanding your options, making the right decisions at the right time, and coordinating with other elements of your financial life. Whether you continue working after claiming Social Security or fully retire, your strategy should reflect your unique circumstances, health, and goals.

Remember, Social Security isn’t just about when you claim—it’s about how you integrate it into a larger income plan that keeps you financially healthy throughout retirement. Much like medicine, there’s no one-size-fits-all solution. A thoughtful strategy, tailored to your needs, can ensure your retirement income plan works just as well as a carefully prescribed course of treatment.

If you’re ready to build or adjust your Social Security strategy, consider sitting down with a financial planner to create a customized plan for your future. After all, the right prescription can make all the difference.

Partnering with Outside The Box Financial Planning (OTBFP) offers numerous benefits for individuals seeking college planning, retirement planning, small business support, wealth management, and beyond.  As a fee-only fiduciary with a comprehensive approach, unbiased advice,  and transparent fee structure, OTBFP acts as a trusted advisor who prioritizes your best interests. Click here to schedule a complimentary “Fit” meeting to determine if we would make a good mutual fit.

Remember, financial decisions have long-lasting implications, and working with a professional like the financial professionals of Outside The Box Financial Planning can provide the expertise and guidance necessary to make informed choices that align with your financial aspirations.

The year-end holidays approach and bring lots of things to do. Yet with holiday cheer there are financial plans to make, too.

Consider these financial opportunities before 2022 arrives.

MAKE FINANCIAL GIFTS

As we count our many blessings and share time with our loved ones, we can express our thanks through giving to others. Donate to your favorite charity before year-end.

Generally speaking, the amount of charitable cash contributions taxpayers can deduct on Schedule A as an itemized deduction is limited to a percentage (usually 60%) of the taxpayer's adjusted gross income. But did you know that the IRS has temporarily suspended limits on charitable contributions?

Sure it might change, but as of now, qualified contributions are not subject to this limitation and individuals may deduct qualified contributions of up to 100% of their adjusted gross income.

To qualify, the contribution must be a cash contribution and made to a qualifying organization. Contributions of non–cash property do not qualify for this relief. Taxpayers may still claim non–cash contributions as a deduction, subject to the normal limits.

You can gift assets or cash to your child, any relative, or even a friend, and take advantage of the annual gift tax exclusion. Any individual can gift up to $15,000 this year to as many other individuals as he or she desires a couple may jointly gift up to $30,000. Whether you choose to gift singly or jointly, you've probably got a long way to go before using up the current $11.7 ($23.4 million for couples) lifetime exemption.

Grandparents, aunts, uncles, and parents too can fund 529 college saving plans this way, but it is worth noting that December 31st is the 529 funding deadline.

MAX OUT RETIREMENT PLANS

Most employers offer a 401(k) or 403(b) plan, and you have until December 31st to boost your contribution. This year, the contribution limit on both 401(k) and 403(b) plans is $19,500 for those under 50 (it's going up by $1,000 next year) and $26,000 for those 50 and older. This year, the traditional and Roth individual retirement account contribution limits are $6,000 for those under 50 and $7,000 for those 50 and older.

But be careful because high earners face contribution ceilings based on their adjusted gross income level.

Remember IRA cash-outs. Once you reach age 72 you are required to take annual Required Minimum Distributions (RMDs) from your retirement accounts.

Your first RMD must be taken by April 1st of the year after you turn 72. Subsequent RMDs must be taken by December 31st of each year. If you don't take your RMD, you'll have to pay a penalty of 50% of the RMD amount.

Did you inherit an IRA? If you have and you weren't married to the person who started that IRA, you must take the first RMD from that IRA by December 31st of the year after the death of that original IRA owner. You have to do it whether the account is a traditional or a Roth IRA.

Consider dividing it into multiple inherited IRAs, thus extending the payout schedule for younger inheritors of those assets. Any co–beneficiaries receive distributions per the life expectancy of the oldest beneficiary. If you want to make this move, it must be done by the end of the year that follows the year in which the original IRA owner died.

If your spouse died, then, you should file Form 706 no later than nine months after his or her passing. This notifies the IRS that some or all of a decedent's estate tax exemption is carried over to the surviving spouse.

Business owners' retirement plans. If you have income from self-employment, you can save for the future using a self-directed retirement plan, such as a Simplified Employee Pension (SEP) plan or a one–person 401(k), the so-called Solo (k). You don't have to be exclusively self–employed to set one of these up – you can work full–time for someone else and contribute to one of these while also deferring some of your salary into the retirement plan sponsored by your employer.

Contributions to SEPs and Solo (k) s are tax–deductible. December 31st is the deadline to set one up, and if you meet that deadline, you can make your contributions as late as April 15th next year (or October 15th with a federal extension).

You can contribute up to $58,000 to a SEP and this rises to $61,000 next year.

If you contribute to a 401(k) at work, the sum of your employee salary deferrals plus your Solo (k) contributions can't be greater than the $19,500/$26,000 limits. But even so, you can still pour up to 25% of your net self-employment income into a Solo (k).

IRS INCREASES CONTRIBUTION LIMITS FOR NEXT YEAR

The Internal Revenue Service announced that the amount individuals can contribute to their 401(k) plans in 2022 has increased to $20,500, up from $19,500 for 2021 and 2020.

From the IRS website:

Highlights of Changes for 2022

"The contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government's Thrift Savings Plan is increased to $20,500, up from $19,500. The income ranges for determining eligibility to make deductible contributions to traditional Individual Retirement Arrangements (IRAs), to contribute to Roth IRAs, and to claim the Saver's Credit all increased for 2022.

Taxpayers can deduct contributions to a traditional IRA if they meet certain conditions. If during the year either the taxpayer or the taxpayer's spouse was covered by a retirement plan at work, the deduction may be reduced, or phased out, until it is eliminated, depending on filing status and income. (If neither the taxpayer nor the spouse is covered by a retirement plan at work, the phase–outs of the deduction do not apply.) Here are the phase–out ranges for 2022:

• For single taxpayers covered by a workplace retirement plan, the phase–out range is increased to $68,000 to $78,000, up from $66,000 to $76,000.

• For married couples filing jointly, if the spouse making the IRA contribution is covered by a workplace retirement plan, the phase–out range is increased to $109,000 to $129,000, up from $105,000 to $125,000.

• For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the phase–out range is increased to $204,000 to $214,000, up from $198,000 to $208,000.

• For a married individual filing a separate return who is covered by a workplace retirement plan, the phase–out range is not subject to an annual cost–of–living adjustment and remains $0 to $10,000.

The income phase–out range for taxpayers making contributions to a Roth IRA is increased to $129,000 to $144,000 for singles and heads of household, up from $125,000 to $140,000. For married couples filing jointly, the income phase-out range is increased to $204,000 to $214,000, up from $198,000 to $208,000. The phase–out range for a married individual filing a separate return who makes contributions to a Roth IRA is not subject to an annual cost–of–living adjustment and remains $0 to $10,000.

The income limit for the Saver's Credit (also known as the Retirement Savings Contributions Credit) for low- and moderate–income workers is $68,000 for married couples filing jointly, up from $66,000; $51,000 for heads of household, up from $49,500; and $34,000 for singles and married individuals filing separately, up from $33,000.

The amount individuals can contribute to their SIMPLE retirement accounts is increased to $14,000, up from $13,500.

Key Employee Contribution Limits That Remain Unchanged

The limit on annual contributions to an IRA remains unchanged at $6,000. The IRA catch–up contribution limit for individuals aged 50 and over is not subject to an annual cost–of–living adjustment and remains $1,000.

The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), most 457 plans, and the federal government's Thrift Savings Plan remains unchanged at $6,500. Therefore, participants in 401(k), 403(b), most 457 plans, and the federal government's Thrift Savings Plan who are 50 and older can contribute up to $27,000, starting in 2022. The catch–up contribution limit for employees aged 50 and over who participate in SIMPLE plans remains unchanged at $3,000."

A SEP May Be The Way To Save On 2017 Taxes

In today’s tight job market, small business owners are in competition to attract and retain top employees with robust employee benefit packages. Many larger businesses find the best approach to meeting their employees’ retirement saving needs is a “qualified” pension or profit-sharing plan. Qualified plans provide an array of features that help employers achieve a range of objectives. However, these plans also involve reporting and recordkeeping requirements, along with administrative expense.

On the other hand, many businesses don’t need every feature offered by a qualified plan. The most appropriate plan for these employers may be one that delivers an attractive benefit with minimal administration and expense. In addition, if employees would like to defer income, the SIMPLE Individual Retirement Account (IRA) may be a cost-effective solution. However, small business owners and sole proprietors may want to consider the Simplified Employee Pension (SEP), an equally effective option.

Is a SEP Right for You?

In 1978, Congress created SEPs as an alternative to traditional retirement plans. Rather than setting up a profit-sharing or money purchase plan with a trust, small business owners can establish a SEP and make contributions directly to a traditional IRA set up for each eligible employee (including themselves). SEPs provide similar advantages to profit-sharing plans, but since the employee controls the IRA, the employer is not responsible for detailed recordkeeping and reporting.

While SEPs are usually most appropriate for small businesses and self-employed individuals, any business (including C corporations,
S corporations, partnerships, and sole proprietorships) can establish a SEP. Unlike a qualified pension or profit-sharing plan, which must be established no later than the last day of the plan year, an employer can establish a SEP plan up until their tax filing deadline, including extensions, which means you may still have time to set one up for 2017!

Establishing a SEP is relatively straightforward. In most cases, the business owner completes an IRS Form 5305-SEP, which is used to set the age and service requirements for plan participation, along with the formula for allocating contributions. Once completed, a copy of this document, in addition to other SEP information, is given to each eligible employee to satisfy legal disclosure requirements.

Participation Requirements

Small business owners may establish age or service eligibility requirements for their plans (in order to retain your employees); however, these eligibility requirements may not be more restrictive than those set forth within IRS form 5305-SEP. The employer may exclude all employees covered by a collective bargaining agreement (if retirement benefits were the subject of good faith bargaining), those under age 21, any employees who have not performed services for the employer in at least three of the previous five years, and employees who have received less than $550 in compensation for the current year.

Contributions to a SEP are allocated to eligible employees in proportion to compensation, with each receiving the same percentage of pay. Employer contributions are always 100% vested. These contributions can be substantial, up to the lesser of 25% of an employee’s compensation (limited
to $270,000 or $54,000 in 2017).

A SEP can provide a substantial tax planning opportunity for the owner. Consider the following example: A CrossFit Affiliate with $250,000 of net income for 2017 that will be passed through to its owner(s) (LLC taxed as S Corp.). Assuming the owner is single with no other income, a $25,000 contribution to a SEP would result in $8,250 of tax savings realized by the owner(s) (Based on 33% marginal tax rate). In other words, a $25,000 contribution towards the owners’ retirement only costs the owner $16,750!

Because contributions are discretionary, employers can vary the amount from year to year, or skip the contribution entirely; however, if the employer makes a contribution in a given year, it must be made for all eligible employees who performed services during the year of the contribution. It is important to note that contributions for self-employed individuals are subject to additional limitations.

If you are a small business owner who values simplicity, wants to retain key employees and get a tax brake for doing, a SEP may be an appropriate choice. For more information, please contact me at ivan@otbfinancialplanning.com. If you found this article helpful, sign up for our newsletter to receive the latest strategies and insights.