Understanding the Layers of Social Security Benefits

Many Americans rely on Social Security as a significant retirement asset, and the options they select can make a substantial difference on retirement income. 
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There is a conventional belief that collecting Social Security benefits should begin as early as possible, which currently means age 62. While this may have been a prudent strategy for millions of retirees in the past, Baby Boomers have created a new paradigm—they’re expected to live longer than any previous generation, making a delayed retirement strategy potentially more lucrative and prudent for themselves and their surviving spouses. 

When to begin collecting benefits may be the most important decision in determining retirement income from Social Security, and there are several factors to consider before selecting a date, including: 

  • Health status,
  • Life expectancy,
  • Need for income, and
  • Plans for continued employment at any level. 

Married retirees have additional factors to consider, including spouse life expectancy and who is the higher wage earner. This analysis is complex and requires careful consideration of the input, assumptions and additional factors such as taxes that will impact your benefits. 

Your benefit eligibility will depend upon: 

  • How much the person earned over his/her working career,
  • The age at which the person applies for benefits,
  • Spousal benefits (extra money allocated to married couples), and
  • Survivor benefits (reassessment of benefits to help the surviving spouse). 

According to the Social Security Administration, Social Security benefits are based onone’s average earnings over the highest 35 years of earned income, with earnings through age 60 indexed to reflect increases in U.S. workers’ average wage level. For example, if the wage level in the U.S is twice as high when a person turns 60 years old as when the person was 40 years old, the formula will double the age 40 earnings. If a person worked less than 35 years, each year the person missed is calculated as a 0. The maximum income in any year is equal to that year’s maximum income subject to Social Security taxes. 

If an individual decides to claim benefits earlier than his/her full retirement age and continues to have more than a modest amount of earned income, he/she may see a reduction or elimination of Social Security benefits. In addition, if an individual earned wages not covered by Social Security, then the estimates provided to by Social Security may be too high. 

Most retirees feel that the two most important goals they have when examining their options are to maximize their expected lifetime benefits and to minimize longevity risk (running out of funds too early because of poor investment choices). 

Making a sound decision about collecting Social Security benefits requires knowledge of spousal benefits and tax impacts. For example, many people don’t realize that divorced spouses are still entitled to their ex-spouse’s benefits. If a person is unmarried but was previously married for 10 or more years, he/she is entitled to collect spousal and/or survivor benefits when both individuals reach the age of 62 and the former spouse files for benefits. Benefits paid to a former spouse do not reduce benefits to current spouses.  

Taxes matter too. Many people are unfamiliar with the taxation of Social Security benefits. If Social Security is an individual’s only source of income, then it is not taxable. If the person has other income, however, including pension income, 401(k) withdrawals, earned income or investment income, he/she may owe taxes on up to 85% of his/her benefit. In a description of Social Security tax law, TurboTax notes there is a range of income where 50% or 85% of benefits may be classified as taxable income for each taxpayer. The actual rate depends on the person’s marginal bracket. This tax can make a significant difference in what an individual is planning to receive on a net basis, and may point to an alternate claiming strategy that maximizes after-tax benefit. Careful analysis can point a person in the right direction.


It’s critical to formulate a strategy for when to initiate benefits, based on an analysis of all retirement assets. A trained and experienced financial consultant offers individuals the expertise, knowledge and software tools to help them design a plan that takes all these important factors into consideration. This type of guidance may pay big dividends in making sure the person leaves no financial benefit on the table after you retire. 

More information about creating a sound retirement strategy and making the most of Social Security benefits is at www.burnhamgibson.com. 

Stuart Friedman, CLU, ChFC has had more than 34 years of experience as a financial services professional providing clients with the guidance they need to help them reach their risk management, investment and financial planning goals. In addition to being a Chartered Life Underwriter and Chartered Financial Consultant, Stuart’s continuing education includes a certificate in Retirement Planning from the Wharton School of Business. He holds a bachelor of science degree in business administration from Boston University. CA Insurance Lic. #0613874 


NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.