Series · Lesson 10

Social Security: What the Family Should Know

Social Security is often treated as a simple retirement benefit: reach a certain age, claim the benefit, and receive a monthly check. For many families, it is much more important than that.

Social Security can provide a lifetime, inflation-adjusted source of income and can play a significant role in retirement planning, tax planning, spouse protection, and survivor planning.

The family does not need to become an expert in Social Security rules. But anyone who may eventually manage the family’s finances should understand what benefits exist, when they can begin, how claiming decisions affect income, and what happens when one spouse dies.

This is Lesson 10 of the Family Financial Continuity Education Series. See also Lesson 9: Understanding Retirement Accounts.

Start With the Social Security Inventory

For each spouse, document:

• Estimated benefit at different claiming ages
• Full Retirement Age
• Earliest claiming age
• Planned or potential claiming age
• Estimated survivor benefit
• Spousal benefit considerations
• Work history and earnings record
• Whether continued employment could affect benefits
• Where Social Security records and estimates are stored

The goal is not necessarily to decide the claiming age years in advance. It is to understand the choices.

Understand the Difference Between Claiming Ages

A person’s monthly retirement benefit generally depends on when benefits are claimed.

Claiming earlier generally results in a permanently reduced monthly benefit. Waiting beyond Full Retirement Age can increase the monthly retirement benefit up to the applicable maximum claiming age.

This creates an important tradeoff:

There is no universally correct claiming age.

The decision should consider health and longevity expectations, other retirement income, investment assets, current cash-flow needs, spousal benefits, survivor protection, tax considerations, employment, and the desire for larger guaranteed lifetime income.

Social Security Is Part of the Retirement Income Portfolio

Retirement income may come from several sources:

• Social Security
• Pension income
• Retirement-account withdrawals
• Taxable investments
• Rental or business income
• Annuities
• Other resources

The family should evaluate these sources together.

For example, a household with substantial investment assets may have more flexibility to delay Social Security, while a household that needs immediate income may choose differently.

The decision should fit the whole retirement-income strategy, rather than being made independently of the portfolio.

Related reading: Annuities: When Do They Make Sense? and Lesson 5: Know Your Cash Flow.

Spousal Benefits Matter

Married couples should understand that Social Security benefits are not necessarily independent.

Depending on the circumstances, a spouse may qualify for benefits based on the other spouse’s earnings record.

This means the couple should evaluate each spouse’s own retirement benefit, potential spousal benefits, when each spouse claims, how the timing affects household income, and what happens when one spouse dies.

A claiming strategy that looks optimal for one spouse individually may not be optimal for the household.

Survivor Benefits Are a Major Consideration

One of the most overlooked aspects of Social Security planning is what happens after the first spouse dies.

The surviving spouse may qualify for a survivor benefit based on the deceased spouse’s record, subject to applicable rules.

This creates an important planning question: What will the surviving spouse’s income look like after one Social Security benefit disappears or changes?

This should be evaluated alongside pension survivor options, retirement-account withdrawals, life insurance, annuities, housing costs, healthcare costs, and other income.

A claiming strategy can therefore affect not only retirement income today but also financial security for the surviving spouse decades later.

Social Security and Continued Employment

Working while receiving Social Security can create additional considerations before Full Retirement Age, including the applicable earnings test.

Once Full Retirement Age is reached, those earnings-test rules change.

The family should therefore distinguish between claiming Social Security while still working and claiming Social Security after employment ends.

This is particularly important for households where one spouse continues working while the other begins benefits.

Social Security Can Be Taxable

Social Security benefits are not necessarily tax-free.

Depending on a household’s other income and applicable rules, a portion of Social Security benefits may be included in taxable income.

This means retirement income planning should consider the interaction between Social Security, traditional IRA/401(k) withdrawals, Roth withdrawals, pension income, investment income, capital gains, and other taxable income.

The family should think about Social Security as part of the taxable-income picture, not as an isolated benefit.

Related reading: Retirement Tax Strategy.

Social Security and Retirement Withdrawals Work Together

Once retirement begins, the family may have multiple ways to fund spending. For example: use taxable investments, withdraw from traditional retirement accounts, use Roth assets, claim Social Security, use pension income, or combine several sources.

The order and timing can influence taxes, portfolio longevity, and future required distributions.

This is why Social Security claiming should be coordinated with the broader retirement-income strategy.

Related reading: The Roth Conversion Golden Valley.

Don’t Focus Only on the Break-Even Age

A common way to evaluate Social Security is to calculate the age at which delaying benefits produces more cumulative lifetime benefits than claiming earlier.

That can be useful, but it should not be the only consideration.

The decision also involves longevity, health, cash-flow needs, investment alternatives, spousal protection, survivor income, tax planning, psychological preference for guaranteed income, and overall portfolio risk.

The value of delaying benefits may be greater for someone who expects a long retirement and wants a larger guaranteed income stream later in life.

Keep Social Security Records Current

The family should periodically review each person’s Social Security earnings record and benefit estimates. Errors in an earnings history can potentially affect future benefits.

The family should also maintain access to the relevant online Social Security account information and know where benefit statements and correspondence are stored.

As with all important financial accounts, access and authority should be addressed before an emergency occurs.

See Lesson 4: The Family Financial Command Center.

What Happens When One Spouse Dies?

The family should have a clear process for handling Social Security after a death.

This should include knowing who needs to be notified, what happens to the deceased person’s benefit, whether the surviving spouse may qualify for survivor benefits, what other income changes at the same time, which household expenses continue, and how the family’s cash-flow plan changes.

This is one reason survivor planning should be incorporated into the original retirement strategy—not addressed only after a death occurs.

Related reading: Financial Continuity.

Social Security Is Longevity Protection

One of the most valuable characteristics of Social Security is that it can provide income for as long as the recipient remains eligible.

This makes it fundamentally different from an investment account.

An investment portfolio can decline. A retirement account can be depleted. A person can outlive their original financial projections.

A lifetime income benefit can provide an important foundation against longevity risk.

This does not make delaying Social Security automatically correct. It simply means the benefit should be evaluated as an important component of the family’s risk-management strategy.

The Social Security Continuity Test

Another family member should be able to answer:

1. What is each spouse’s estimated Social Security benefit?
2. What is each spouse’s Full Retirement Age?
3. When could each spouse claim?
4. What is the current claiming strategy?
5. How do spousal benefits work in our situation?
6. What happens to income when the first spouse dies?
7. Could continued employment affect benefits?
8. How does Social Security interact with our other retirement income?
9. How might Social Security affect our tax picture?
10. Where are our Social Security records and estimates located?

If the family cannot answer these questions, Social Security is not yet fully incorporated into the family’s retirement plan.

The Goal: Treat Social Security as Part of the Whole Plan

Social Security should not be viewed as simply another monthly deposit.

It is a component of the family’s:

• Retirement income strategy
• Tax strategy
• Longevity strategy
• Spousal strategy
• Survivor strategy
• Estate and legacy strategy

The right claiming decision depends on the family’s circumstances and should be coordinated with the rest of the financial plan.

The most important principle is simple: Don’t just ask, “When should we claim?”

Ask:

How should Social Security fit into our family’s lifetime income and protection strategy?

Previous: Lesson 9: Understanding Retirement Accounts. Continue with Lesson 11: Insurance: What Protects Our Family and Why?.