How to Get the Most from Social Security

Taking Social Security benefits at the wrong time is a common error, and it can cost thousands of dollars. Here's how to get it right.

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One of the biggest mistakes retirees make is getting their Social Security benefits wrong—taking them too early or too late, or failing to coordinate with their spouse. Miscues in this area can cost thousands of dollars over the course of a retirement.

In one respect, mistakes are understandable. Getting every dollar you are eligible to receive can be painfully complicated. The economist Larry Kotlikoff, an authority on maximizing Social Security benefits, estimates that a 62-year-old couple must, before they reach 70, choose from over 100 million possible combinations in terms of precisely when to take benefits and make various adjustments.

In another respect, though, getting Social Security seriously wrong is inexcusably negligent. The typical retiree counts on Social Security for 70% of his or her income. About one in four retirees has no other ready source of funds, and in the 401(k) age even those with a decent nest egg may have no other stream of guaranteed lifetime income.

The good news is that for the vast majority of retirees, getting the calculus right on Social Security should be easy. It only gets complicated in a handful of relatively unusual situations: 1) when spouses of very different ages both have earned income and one income is significantly larger than the other; and 2) when you want to keep working late in life.

The basic rule is to delay benefits to age 70 if at all possible. That way you get the highest possible monthly payout, which will keep coming for as long as you live. You become eligible for early but reduced benefits at age 62 and full benefits between 65 and 67, depending on the year you were born. But for every year that you delay taking full benefits, the monthly payout you eventually receive increases until age 70, when you max out your income stream.

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Consider someone born in 1937. Their normal retirement age was 65 (true for anyone born before that). If they started collecting at 62, they got just 80% of their full monthly benefit. But if they waited to age 70 they got 132% of their full monthly benefit. The math is similar at all age groups. Those born in 1960 have a normal retirement age of 67 (true for anyone born after that). If they choose to collect at age 62 they’ll get just 70% of their full benefit but if they wait to age 70 they’ll get 124%.

These are meaningful differences. The typical monthly benefit today is around $1,200. That would mean a 76-year-old who took early benefits is getting $960 a month while one who waited to age 70 is getting $1,584. Schwab figures that by the age of 81 a top-earning retiree who delayed benefits comes out marginally ahead, and everything they receive the rest of their life is a bonus. The math is a little different for everybody; your beak-even may be age 83 or 84. You can estimate your break-even point with an online calculator.

A lot depends on your health. If you are in poor health, it may make sense to start collecting as early as possible. If you and your partner are in decent shape, however, you stand a good chance of one or both getting past the break-even point. Your main consideration should be whether you could get by on savings and other income until you reach age 70 — but if the answer is yes, the safe bet is to assume you or your spouse will live long enough to benefit from the near-term sacrifice. As Kotlikoff writes: “Social Security benefits are an insurance policy against one of life’s most expensive accidents: failing to die on time. Unless you or your partner has a terminal condition, you probably should figure on living to 100 for the simple reason that you might.”

Once you’ve considered delaying, the next big planning point for couples is managing spousal benefits. A lower earning spouse is entitled to three types of benefits: one based on his or her own earnings; a benefit equal to half the higher earning spouse’s benefit; and a survivor benefit equal to the higher earning spouse’s benefit after he or she dies.

A common strategy is to begin collecting the lower-earning spouse’s benefit early but delay the higher-earning spouse’s benefit to age 70. This gives you some income now and will max out the biggest benefit. It also ensures that the second to die will be left with the highest monthly income stream possible from Social Security.

But there is no cookie-cutter approach. You might also be better off filing for benefits at normal retirement age, triggering the spousal benefit for a low-earning partner, and then suspending your own benefits until age 70. This is the kind of complex strategy that can stretch income but probably requires the eye of a professional. Couples can get more timing tips here. In general, it’s also a good idea to postpone early benefits for as long as you have income from a job above $15,120.

Perhaps the biggest trap to avoid is thinking that you should grab what you can while it’s still there. Social Security is projected to have all the funds it needs for at least two decades. So relax. You have time. Yes, sorting it all out can be complicated. But the basic rules will work for most people.

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