How to help clients maximize Social Security benefits

Social Security is often a starting point for retirement planning

Social Security is one of the few sources of guaranteed income that will increase over the course of retirement. But, to be sure, clients need to have a retirement income strategy that goes beyond Social Security. The majority of Americans (88%) said it is critical to have another source of guaranteed income beyond Social Security in order to have a comfortable retirement, in a recent study from Allianz Life.1

A solid strategy is to have enough reliable income sources to cover essential needs in retirement. Sources of guaranteed income include pensions, annuities, and Social Security benefits. Essential expenses include food, clothing, shelter, and health care.

No matter what role Social Security benefits play in a client's retirement strategy, they will want to receive the maximum benefit possible. A thoughtful decision about how and when to claim benefits is critical. To maximize a client’s benefit, financial professionals should consider work history, benefit start date, taxes, and other income.


Work history

Americans need about 10 years of work history to be eligible for an individual retirement benefit under Social Security. A person’s work history does not have to be consecutive.

The more a client pays in to Social Security during their career, the more money they will receive in benefits. Social Security benefits are calculated by looking at average indexed monthly earnings for a person’s highest 35 years of earnings. Actual earnings are indexed for inflation to today’s dollars.

This amount is the primary insurance benefit amount. The actual amount paid will be adjusted based on other factors. Social Security does have a cap. The maximum benefit in 2023 is $3,345 a month.


Benefit start date

Clients can start taking Social Security benefits at age 62. But those benefits are reduced between 25% and 30% from the primary insurance amount, depending on birth year.

For example, a client who was born in 1954 and starts taking Social Security at age 62 will receive 25% less than their primary insurance amount. A client born in 1960 would receive 30% less at age 62. It pays to delay Social Security.

Full retirement age is between 66 and 67 years old, depending on birth year. For every year of delay, benefits increase about 8%. The benefit to delay continues until age 70. So it is possible to receive more than the primary insurance amount by delaying benefits. Delaying benefits can add thousands of dollars to annual benefits.


Taxes on Social Security

Social Security benefits are considered taxable income along with wages, interest, and dividends. The extent to which the benefits are taxed is based on a calculation for provisional income. This calculation adds together adjusted gross income, otherwise non-taxable interest, and 50% of Social Security benefits.

Taxes on Social Security vary based on this calculation. Up to 85% of Social Security benefits may be taxable. Individual taxpayers with provisional income greater than $34,000 or married filing jointly taxpayers with provisional income greater than $44,000 could have up to 85% of their Social Security benefit taxed. Those with lower provisional income would have less of their Social Security benefit taxed.


Other income impacts benefits

Clients can start to take Social Security while working. But earning income while collecting benefits can alter the amount of benefits received.

For example, benefits may be withheld if earnings thresholds are passed before a client reaches full retirement age.  A client who takes benefits before their full retirement age and earns more than the limit would have $1 in benefits withheld for every $2 above the limit. That means if a client earns $40,000 over the limit, $20,000 in benefits would be withheld. The withholding would stop after a client reaches full retirement age.

Continuing to work could also increase a client’s primary insurance amount. Higher income years at the end of a career can increase the primary insurance amount for Social Security, even after benefits have already begun.

This is not a comprehensive list of all the rules involving Social Security benefits. For example, clients who are eligible for pension income from work that was not covered by Social Security may have their benefits reduced.


Learn about Social Security after divorce

Claiming a spousal benefit could offer greater supplementary income for a divorced client during retirement.

1 Allianz Life conducted an online survey, the 2023 1Q Quarterly Market Perceptions Study, in March 2023 with a nationally representative sample of 1,005 respondents age 18+.

This content is for general educational purposes only. It is not intended to provide fiduciary, tax, or legal advice and cannot be used to avoid tax penalties; nor is it intended to market, promote, or recommend any tax plan or arrangement. Allianz Life Insurance Company of North America, its affiliates, and their employees and representatives do not give legal or tax advice or advice related to Social Security or Medicare. Customers are encouraged to consult with their own legal, tax, and financial professionals for specific advice or product recommendations, or the Social Security Administration (SSA) office for their particular situation.