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How to Maximize Social Security Benefits – Withdrawal Options & Benefits


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In 2004, Social Security benefits were projected to account for 40% of a baby boomer’s post-retirement family income, and almost all baby boomer retirees were expected to receive benefits, according to a Social Security Administration study. But those projections turned out to be conservative.

Today, according to a Social Security fact sheet, large numbers of older Americans rely on Social Security.

Among elderly beneficiaries, Social Security provides more than half of income for 50% of married couples and 71% of unmarried people. Among recipients age 65 and older, 21% of married couples and 45% of unmarried people rely on Social Security for more than 90% of their income.

As pensions become increasingly rare — replaced by defined contribution plans, which are subject to the volatility of financial markets — the importance of Social Security continues to grow.

Social Security Monthly Dollar Retirement Benefits

Generally speaking, the amount of Social Security you receive is based upon your total lifetime earnings that were subject to Social Security taxes.

There is a cap on the amount of income that is subject to Social Security tax each year — as of 2021, the maximum amount is $142,800 per year. If you make more than that, any income over $142,800 isn’t subject to the Social Security tax.

How much you receive in Social Security benefits depends in part on how much Social Security tax you pay. In other words, the more money you make over your working career, the more you receive when you begin withdrawing.

The precise amount of the benefit paid to a beneficiary is the result of an SSA calculation, based upon that person’s top 35 years of earnings, adjusted for inflation.

It’s further affected by the age at which you begin receiving benefits. In 2021, according to the Social Security Administration, the maximum payment for an individual who begins claiming at full retirement age is $3,895 per month.

For help estimating your future benefits — as well as verifying your earnings each year — the SSA provides a useful online resource, My Social Security, to check your earnings record. Many of the criteria that determine the amount you receive, however, are actually within your control.


Social Security Age Withdrawal Options

There are several options for when you can start withdrawing your Social Security benefits. When you elect to begin withdrawing your Social Security benefits affects how much you receive.

1. Regular Withdrawal Age

The original Social Security program established a normal retirement age of 65, at which people could begin receiving benefits. In 1983, Congress passed Social Security amendments to gradually raise that age to 67 — anyone born in or after 1960 must reach that age before collecting full retirement benefits.

2. Early Withdrawal Age

The program offers an early retirement withdrawal option beginning the month after turning 62, provided that you have a minimum of 40 retirement credits — in 2021, one credit is earned for each $1,470 of earnings annually, up to four credits per year. The dollar amount each credit is worth adjusts annually based on average earning levels.

If you choose to withdraw early, your benefit amount is reduced according to the following parameters:

  • Up to 36 Months Early: Payment amount is reduced by five-ninths of 1% (0.555%) for each month prior to your regular retirement age. For example, a person who would be entitled to a $1,000 monthly benefit at regular retirement age would receive $933 per month if retiring 12 months early: $1,000 – ($1,000 x 12 x 0.00555).
  • Between 37 Months and 60 Months Early: In addition to the above, benefits would be further reduced by five-twelfths of 1% (0.417%) for each month in excess of 36. Accordingly, a person entitled to a $1,000 monthly benefit but taking payments 48 months prior to regular retirement age would receive $750 per month: $1,000 – (36 x 0.00555 x 1,000) – (12 x 0.00417 x 1,000).

3. Benefit Reductions for Working While Taking Early Withdrawals

Some people who have yet to stop working elect to receive Social Security payments before their regular retirement age, but that may result in a reduction of benefits in the months they continue to work:

  • Years Before Reaching Regular Retirement Age: Benefits are reduced by $1 for every $2 of earned income in excess of $18,960, as of 2021, until you reach regular retirement age. For example, if you elect to take early Social Security benefits in 2021, but have $30,000 in earned income for the year, your 2021 benefit would be reduced by $5,520: ($30,000 – $18,960) / $2.
  • Year of Reaching Regular Retirement Age: In the year you actually reach regular retirement age, the penalty is reduced so that you lose $1 for every $3 earned over the limit. In 2021, the limit is $50,520. For example, if you elect to take early retirement benefits and have $60,000 in earned income the year you reach your regular retirement age, your Social Security benefit for that year is only reduced by $3,160: ($60,0000 – $50,520) / $3.
  • Years After Reaching Regular Retirement Age: There are no limits on outside earnings once you have reached regular retirement age. Your Social Security benefit is not reduced, regardless of your earned income.

If you opt to receive Social Security benefits while still working and have those benefits reduced due to the income you earn, the Social Security Administration will recalculate your benefits when you reach retirement age.

The recalculation will add the income you earned during the months where your Social Security benefit was reduced by your earnings. This could increase your Social Security income. In this way, you can get back some of the amount deducted from your Social Security benefit while you keep working.

Nevertheless, people who anticipate working until their regular retirement age and earning significantly more than $15,480 during those working years should rarely consider taking Social Security benefits early.

4. Deferred Withdrawal Age

Just as some people elect to take Social Security benefits early, others decide to delay payments past their regular retirement years. For each month you hold off beyond your regular retirement age, your monthly benefit increases two-thirds of 1% (0.67%).

For example, if you were born in 1943 or later and delay a $1,000 monthly payment for three years, your benefit would increase to $1,241: $1,000 + ($1,000 x 36 x 0.0067).


Taxation of Benefits

Depending on your income, you may have to pay income tax on your Social Security benefits. Typically, this only happens if you have income outside of Social Security, such as continuing to work, income from annuities, or income from investments.

Individuals with incomes between $25,000 and $34,000 must pay income tax on half their Social Security benefit payments. Those earning more than $34,000 will pay income tax on up to 85% of their Social Security benefit.

If you file a joint return with a spouse, you’ll pay tax on up to half of your benefits if your income is between $32,000 and $44,000. If your combined income is over $44,000, up to 85% of your Social Security benefits may be taxed.

For this reason, it’s best to wait to collect Social Security benefits until you stop working and your taxable income is lower because that will reduce the amount your Social Security benefits are taxed.

Because calculating these taxes is a complicated task, IRS Publication 915 has instructions and worksheets that can make the process easier.


Determining Your Optimal Withdrawal Age

Deciding when to start taking Social Security payments is an essential part of retirement planning. You want to make sure you have the income you need to survive while getting as much money as possible.

To maximize the amount you get from Social Security over the course of your retirement, you need to choose the right time to start drawing benefits. Figuring out the best time means weighing a few different factors:

Projected Benefit Amounts

The earlier you begin taking payments, the more your benefits are reduced. Conversely, the longer you delay, the more you get with each check. A person entitled to a $1,000 monthly payment at age 67 would receive $702 at age 62, or $1,240 at age 70.

Determine how your benefit is affected based on your plans for retirement.

Number of Payments Expected

According to the Social Security mortality tables, a male has a remaining life expectancy of 20.08 years at age 62, 17.18 years at age 66, and 14.39 years at age 70. Women are expected to live an additional 22.9 years from 62, 19.65 years at 66, and 16.54 years at 70.

If a man whose full benefit is $1,000 chooses to take early benefits at age 62, he will receive lifetime benefits of $168,480 ($702 x 240). At age 66, his expected total payments will be $206,000 ($1,000 x 206), and at age 70 they will be $214,520 ($1,240 x 173).

If you think you may live past 82, you should delay benefits until age 70. Deferring benefits is even more beneficial if you have a spouse who is likely to outlive you.

Taxation Considerations and IRA and 401(k) Withdrawals

Consider your other sources of retirement income when determining whether and how much your Social Security benefits will be taxed.

For example, withdrawals from traditional IRAs and 401k plans are taxable, which means they may not only reduce your monthly benefit — if you elect to take Social Security early — but could also result in taxation of those benefits.

Deferring distributions from traditional IRAs and 401(k)s until your regular retirement age is one way to limit external income and avoid a reduction of Social Security payments.

You may want to consider transferring your traditional retirement accounts into equivalent Roth accounts. There’s no penalty for doing so, but you are required to pay income tax on the transferred funds when you make the change.

The benefit of the Roth IRAs and Roth 401(k)s is that withdrawals are not taxed — which may eliminate the eventual tax bite on your Social Security payments.

Before taking steps toward conversion, seek competent tax advice to calculate whether it can minimize your future tax burden, as well as the taxes you would owe in the year of the conversion.

Pro tip: If you’re investing in a 401(k), IRA, or another retirement account, make sure you sign up for a free Blooom portfolio analysis. Once you connect your accounts, they’ll assess your portfolio to make sure you’re in line with your risk tolerance, are properly diversified, and not paying more than you should in fees. Read our Blooom review.


Spousal Benefits

Married couples have additional options, whether both spouses work or only one does.

Nonworking Spouses

According to the Social Security Administration, you are entitled to receive 50% of your spouse’s benefit (at regular retirement age) for as long as your spouse lives.

For example, if Bill is entitled to receive $1,000 per month at age 66, his spouse, Mary, is entitled to a benefit of $500, even if she has never worked or paid Social Security taxes. Mary can begin receiving payments as early as age 62 (subject to the same dollar deductions for early withdrawal). The couple’s combined income would be $1,500 monthly: $1,000 for Bill + $500 for Mary.

Spouses are eligible for their payments even if the primary earners delay their own benefits — as long as the primary earner applies for Social Security.

For example, Bill at age 66 (his regular retirement age) could apply for Social Security but defer his own benefit. At the same time, however, Mary can elect to take her spousal benefit ($500 per month at her regular retirement age). When Bill reaches age 70 he can take his increased, deferred benefit. He receives a $1,240 monthly benefit while Mary continues to receive $500.

Working Spouses

When both partners worked and are entitled to Social Security payments, it is possible to maximize total benefits under the little-known “restricted application for spousal benefits.” The process consists of applying for a spousal benefit for one partner while delaying benefits for the other.

Restricted application in some cases can significantly increase the total Social Security benefits received by both partners. Consider the following examples:

Without Restricted Application

Tom is 66 and John is 62 when they elect to begin their Social Security retirement benefits. Each is entitled to $2,000 at their regular retirement ages, so Tom receives $2,000 per month (because he is at his regular retirement age) and John receives $1,500 per month (because he is withdrawing early).

Their total monthly benefit as long as they both live is $3,500 per month, or $42,000 annually.

With Restricted Application

Although entitled to a $2,000 payment at his regular retirement age, John claims an early benefit of $1,500 (not his spousal benefit). Tom elects to delay his own retirement benefits until age 70, but takes his spousal benefit on John’s regular $2,000 payment — because he has reached regular retirement age, he is entitled to 50% of it.

As a result, their combined monthly income is $2,500 ($30,000 per year): $1,500 for John + $1,000 for Tom. That’s $12,000 less than they would have received without the restricted application ($42,000).

However, four years later, Tom switches from his spousal benefit to his own account, where he receives increased distributions because he waited until age 70. As a consequence of this deferral, his regular benefit of $2,000 increases to $2,640. Tom and John’s combined Social Security benefit at that point is $4,140 per month ($49,680 annually): Tom’s benefit of $2,640 per month + John’s benefit of $1,500.

Comparison of Economic Benefits With and Without the Restricted Application

The $12,000 difference in annual benefits before Tom elects to take his own distributions adds up to $48,000 for the four-year period. However, in year five and all future years Tom and John are alive, their annual income is $49,680, an increase of $7,680 from the $42,000 they would have received had they not elected to use the restricted application.

The decision whether to use the restricted application depends upon the length of time those higher payments are likely to be received. The couple would need to receive the higher distribution amount for approximately 6.25 years to make up for their lower benefits during the first four years. If Tom survives past age 77 and John past age 73, they come out on top using the restricted application.


Coordinating Individual and Spousal Benefits

There is no universally optimal time to begin taking benefits. These decisions should be considered along with analysis of other retirement benefits, the gender, health, and ages of you and your spouse, and the possibility of changes to Social Security rules and the income tax code. Unfortunately, many retirees overlook the various options and strategies within their control and consequently fail to maximize their benefits.

If you’re not sure what your best route is, seek the advice of a qualified tax and benefit counselor. The right strategy can add thousands of dollars to your retirement security.


Potential Social Security Changes

The Social Security program has been the subject of increasing political discussion over the past several years as the economy has failed to improve in certain areas and the national debt continues to climb.

Because the costs of Social Security and Medicare account for a growing percentage of federal expenditures, it is possible (if not likely) the programs will end up undergoing significant modifications.

In 2012, the American Association of Retired Persons (AARP) listed a number of potential changes, including the following:

  1. Raising Full Retirement Age. Proposals call for raising the regular retirement age from 67 to 68 or 70. Either change would make the Social Security program more financially secure, but reduce benefits significantly for low- and middle-income workers whose longevity has not necessarily increased like that of highly paid workers.
  2. Changes in Maximum Income Subject to Payroll Tax. Social Security is funded through employee and employer taxes, and calculated based on taxable earnings up to a maximum income of $142,800 in 2021. Eliminating the cap on the amount of earnings subject to the Social Security tax — by either extending the tax to cover 90% of earned income as proposed by the AARP or eliminating the maximum salary cap altogether — would increase Social Security revenues, thus strengthening the program.
  3. New Taxes for Employers and Beneficiaries. According to proponents, increasing the existing payroll tax rate of 6.2% to 7.2% for employees and employers alike would eliminate almost two-thirds of the projected future income gap. On the other hand, some economists claim that any increased cost of labor will accelerate the transfer of work to machines and automation, thereby eliminating jobs — especially in the lower-skill ranks.
  4. Means Testing for Benefits. Currently, everyone who pays into the Social Security system is entitled to receive a benefit. “Means testing” would reduce or eliminate benefits for individuals whose income or assets exceed defined thresholds. For example, wealthy individuals such as Warren Buffett or Bill Gates would not receive Social Security benefits at all; or, if they did, it would be at a reduced level. This proposal recognizes that wealthy individuals with significant assets are unlikely to need Social Security benefits to maintain their lifestyles. In a “60 Minutes” interview, former Republican presidential candidate Mitt Romney said he supported means testing for Social Security and Medicare: “Higher income people won’t get as much as lower-income people.”

More recently, President Biden has proposed a few changes to Social Security.

  1. Increased Benefits for Those Who Rely Most on Social Security. This includes low-wage workers, those who receive survivor benefits, caregivers, government workers, and those who have been collecting Social Security for the longest.
  2. Index Social Security Benefits to Inflation. Currently, people receiving Social Security benefits receive a 0.2% increase in their benefits each year as a cost-of-living adjustment (COLA). President Biden proposes indexing benefits to inflation according to the Consumer Price Index for the Elderly (CPI-E). CPI-E measures the cost of living for older Americans by looking at changing prices for necessary goods and services such as housing and health care. Pegging Social Security benefit increases to the rate of inflation would generally mean larger benefit increases each year than under the current system.
  3. Increase Social Security Taxes on High Earners. To fund these benefit increases, the President proposes adding an additional Social Security tax on income over $400,000 in a year.

Additional modifications to Social Security — proposed by conservative politicians — include the addition of equity funds as an investment option and the total privatization of the Social Security program.

Despite the lack of significant change to Social Security in recent years, there is widespread agreement among politicians on both sides of the aisle that the existing system is broken.

Without modification, it’s unlikely that future beneficiaries will have the same financial security as their parents. As a consequence, the questions about Social Security are not whether it will change, but when and how.


Final Word

While the combination of multiple international and domestic crises and virtual deadlock between political parties make any near-term Social Security reforms unlikely, current and future beneficiaries should monitor any proposal that has the potential to change the program — and the benefits they are likely to receive upon retirement.

Understanding your options and staying abreast of looming modifications can help you maximize the benefits you get both now and in the future.

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