Social Security is a core component of every retirement plan, yet few couples approaching retirement are aware of the nuances of Social Security and how to maximize their income in retirement. Choices about when to draw Social Security and, for married couples, what type of claim to make can result in a difference of literally hundreds of thousands of dollars in income over the course of retirement.

The first thing we consider in working with clients is whether or not the Social Security income is needed, particularly if the client is below full retirement age. Full retirement age (FRA) is defined by the Social Security administration as the age at which a client can draw his or her full Social Security benefit. FRA is determined by date of birth, and more information is available here on the Social Security Administration website.

One reason full retirement age is key in determining when to draw benefits is that the Social Security Administration limits the amount of income that can be earned prior to full retirement age. For 2015, the income limit is $15,720, and if that limit is exceeded, Social Security benefits are reduced by $1 for every $2 earned over the limit if Social Security benefits are being drawn before full retirement age. Thus, if a person is slated to receive a Social Security benefit prior to full retirement age of $15,000 per year, and earns $45,720, her Social Security income will be entirely eliminated. The negative impact of the reduction in income is compounded by the fact that the Social Security benefit is permanently reduced if benefits are started before full retirement age.

For most individuals, the earliest age at which they can draw Social Security is 62. However, drawing Social Security early results in a reduction in monthly benefits paid and the earlier filing for Social Security occurs, the greater the reduction. The formula to calculate the reduction is based on the number of months before FRA at which benefits begin, and for someone who has a full retirement age of 67, drawing benefits at age 62 results in a reduction of 30%. Conversely, delaying benefits beyond full retirement age increases the benefit paid by up to 8% per year through age 70.

If we take a hypothetical individual whose benefit at age 67 (full retirement age) is roughly $2750 per month, drawing at age 62 would result in a reduced benefit of $1880 per month. On the other hand, delaying benefits until age 70 would yield a monthly payment of $3440 per month. If the individual in question had elected to receive benefits early and then exceeded the allowable income cap, the Social Security benefit in that year would be reduced or eliminated while the ongoing benefit would be permanently reduced. For that reason, we think it is critical that clients begin drawing Social Security when it is needed and not before*.

Another key issue to consider with regards to when to draw benefits is likely longevity. For those that are long-lived, Social Security can offer insurance against living longer than expected. Furthermore, delaying Social Security benefits can lead to a greater amount of benefits paid out over one’s lifetime. This occurs when the higher monthly payment that is earned by the delay in taking benefits offsets the income a claimant would have earned had they begun benefits earlier.

Considerations for couples become even more complex, and I’ll outline those issues in the next blog post.

* The exception to this rule is that even if the income isn’t needed, Social Security benefits should be drawn at age 70. There are no increases provided beyond age 70 for delayed filing.