How does Social Security fit into my retirement?

You’ve paid into Social Security from your very first paycheck. As you get closer to retirement, figure out the best strategy for how and when to start taking benefits to receive more dollars and owe less tax.

Get a ballpark estimate
Social Security is income you should be able to depend on, but it’s just one slice of your retirement savings pie. Your benefits are based on earnings during your working years, and the average monthly payment is about $1,827 per month. Whether that sounds generous or paltry, it’s smart to think about Social Security as a way to pad your other retirement income.

Consider waiting
Typically, you can start receiving Social Security benefits between ages 62 and 70. If you want to claim the maximum benefit, you have to reach full retirement age (67 for those born after 1960). If you start drawing benefits as early as you can, your monthly amount will be reduced. Wait until age 70, and your monthly benefit will increase. Figure out how your timing (and your partner’s) can impact income. It may pay to be patient.

Collect strategically

Talk to your financial and tax professionals about the best way to begin drawing Social Security. Have you maxed out contributions to your own IRA (individual retirement account) or 401(k)? You could structure your current investments to provide a relatively stable income while you let your Social Security benefits grow.

Reduce your tax bill

You may be surprised that Social Security can be taxable income. Depending on where you live and your other sources of income, you may have to pay taxes on your benefits. Here are three ways to help you keep more of your Social Security dollars.

1. Wait to claim benefits until you’ve stopped working. If you’re still getting a paycheck while drawing Social Security, you’re likely to exceed the income threshold at which your benefits become taxable.
2. Consider pension income. If you are eligible for pension benefits beginning at age 65, Social Security could be tax-free until your pension income begins. So you may want to start claiming those payments earlier.
   
3. Get a draw-down plan. If you have saved in both traditional and Roth IRAs, you may be able to manage withdrawals to reduce income taxes. Roth contributions are made after tax, so distributions don’t count as taxable income. Talk to a financial professional to set up a tax-efficient withdrawal plan.