How to Get the Most Out of Social Security

Social Security payments are the primary source of income for many retirees. About 60% of respondents to a 2022 survey conducted by the Federal Reserve Board indicated that their retirement savings weren't on track, and they were still largely dependent on government benefits to get by. The survey also found that 25% of retirees who retired in the past 12 months and 15% of those who retired one to two years ago said that factors related to the COVID-19 pandemic had affected the timing of their retirements. Of course, pandemic-driven inflation has been one of the biggest hurdles, but it's also created a bit of silver lining, too: The cost-of-living adjustment got its biggest boost in more than 40 years, helping social security payments to go a bit further. Whether you expect Social Security to be your sole means of support or a source of pocket change, it's a good idea to plan how to get the most out of your benefits — before you hit retirement age.

Related: No Pension. No 401(k). How to Get by on Social Security

Higher prices for housing, cars, food, and other consumer goods mean social security recipients are seeing a higher cost-of-living adjustment. After rising 5.9% for 2022, retirees got an 8.7% increase in 2023, the Social Security Administration said, making it the biggest jump since 1981. For the average beneficiary, the increase adds an estimated additional $146 a month to existing benefits. 

Related: Inflation Eases but Continues to Hit Consumers' Budgets

Throughout your working years, the Federal Insurance Contributions Act (FICA, as it appears on your pay stub) taxes part of your wages that count as credit toward Social Security. The Social Security Administration determines your monthly benefits based on how much you earned during your 35 highest grossing years before you file a claim. The calculation also factors in your age and the number of years you worked. The result is known as the primary insurance amount, or PIA. Check the official online estimator to see how these numbers work out for you.

Related: The Big Challenges Seniors Face in Everyday Life

In a survey by MassMutual Life Insurance Co., more than 70% of respondents incorrectly assumed the retirement age was 65. Full retirement age is 66 for people born between 1943 and 1954 and rises incrementally to 67 for those born in 1960 and after. Though you can start collecting Social Security benefits when you turn 62, the amount of your monthly payment is permanently reduced. For some, the reduction can be as much as 30%.

The maximum payout at full retirement age is $3,627 a month in 2023. But most financial planning experts recommend waiting even longer to start receiving benefits. For each year you hold off beyond 66 or 67 up to the maximum age of 70, the size of your monthly payment increases. Those who waited until age 70 and retired in 2023 will see a maximum benefit of $4,555. Once the benefit stream starts flowing, regardless of your age, there is no turning back; you cannot change your mind.

The first Social Security payout is the base line for what you will receive every month thereafter. Each October, the Social Security Administration calculates a cost of living adjustment, based on changes in the federal consumer price index, and increases your monthly benefit accordingly for the following year. When you delay Social Security payments beyond the minimum retirement age of 62, the cost of living adjustments you "missed" are factored into the benefit you ultimately receive.

The decision to stop working is, of course, a very personal one. There are many factors to consider when assessing the right time to push "go" on Social Security, including the question with an unknowable answer: How long will you live? Although waiting longer to collect benefits increases the monthly payout, it may not make sense for you. If your health is poor, it may be more prudent to start receiving Social Security now. And if you find yourself in financial straits once you hit retirement age, collecting a smaller benefit for a longer period might be the wiser (and necessary) choice.

It's possible to retire at 62, delay collecting Social Security, and still maximize your financial situation. Depending on the size and nature of your retirement savings, you could draw on investments, particularly those made through a tax-deferred account such as a traditional IRA or 401(k), until Social Security checks start flowing. Research by a consulting firm that partners with Kiplinger suggests that waiting on Social Security could be more beneficial than limiting withdrawals from a private retirement account. That is, you would wind up with a larger Social Security benefit and likely extend the longevity of your retirement account. But the decision involves complicated calculations that depend in part on the type of investments you have and is best discussed with a financial-planning professional.

You can keep your job after hitting age 62 and still collect Social Security, but there is a penalty for doing so. Until you reach full retirement age, the Social Security Administration will deduct $1 from your benefit for every $2 you earn above $18,960. If you are working the year you reach full retirement age (66 or 67), the SSA will deduct $1 for every $3 earned above $50,520 before your birth month. These deductions are temporary; when you stop working, the SSA will recalculate your benefit based on earnings and the benefits withheld. If you work beyond full retirement age, you can collect the full benefit regardless how much you earn.

Being married has its advantages as far as Social Security is concerned. When one spouse files for benefits, the other may collect up to half that amount, assuming both spouses are at least 62. This is a boon to couples where one spouse didn't earn any credits toward Social Security or earned significantly less than the other. For example, if a husband and wife retire at 66 with full retirement benefits — she at $1,785 a month and he at $600 a month — he can file for spousal benefits worth $893 instead of his own Social Security. Meanwhile, the value of his benefits continue to increase until age 70; at that point, he will receive the greater of the two. Spousal benefits are reduced for people younger than full retirement age.

This tactic for maximizing spousal benefits pays off most when one half of the couple has reached full retirement age with accrued earnings that exceed those of the other spouse. The high-income earner can file for Social Security and immediately suspend the benefits flow. The lower-earning spouse, who must be at least 62, can then file for spousal benefits while the value of the higher earner's benefits continue to grow until he or she reinstates the claim (ideally at age 70).

A surviving spouse at least 60 years old can collect a percentage of a deceased spouse's benefit. By waiting until full retirement age, the surviving spouse would receive a higher benefit — up to 100% of the deceased's benefit, depending how old the deceased was when Social Security payments started. Survivor benefits are available even if the deceased was not yet receiving checks from the Social Security Administration. If both spouses are retired and collecting Social Security, the higher benefit is the one that endures regardless which half of the couple lives longest.

Once Social Security benefits kick in, recipients with income over certain thresholds must pay the tax man. (Income includes variables such as wages, capital gains, dividends and interest payments, payouts from retirement accounts, and one-half of Social Security benefits.) A married couple with income of $32,000 to $44,000 owes taxes on up to half the value of their Social Security benefits. Income exceeding $44,000 incurs taxes up to 85% of the annual benefit. For single recipients, the outside income thresholds are $25,000 and $34,000.