A Smarter Way to Think About Social Security

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Planning for retirement is one of the biggest financial challenges you'll ever face. With a goal that's so far in the future and with so much uncertainty about what your finances will look like by the time you retire, it can be tough just getting your fingers around the scope of the problem, let alone actually coming up with smart strategies.

But one thing that can help you simplify your retirement planning is to integrate your finances rather than separating them into different buckets. If you can unify your retirement assets into a single cohesive structure for planning purposes, you may find it a lot easier to figure out how to make some key decisions that will have a huge impact on your retirement lifestyle. And one of the biggest assets every American has is Social Security.

When to take Social Security
When it comes to key retirement issues, few things loom larger than deciding when you should start taking Social Security benefits. On one hand, you can start taking benefits as early as age 62. But by electing to receive checks earlier than your normal retirement age, the size of those payments will be smaller -- as much as 25% smaller than if you had waited.

On the other hand, you can also elect to wait beyond your normal retirement age. If you choose that route, Social Security rewards you with boosted payouts -- as much as a third more than your normal benefits, if you wait until age 70 to take benefits.

Add those two things together, and you get checks that can differ in size by more than 75% depending on when in the eight-year span between 62 and 70. And given that the choice you make will affect those payments for the rest of your life, you can't afford to make a mistake.

Looking beyond life expectancy
Many retirement experts look at the Social Security decision solely as a question of maximizing total benefits. For instance, if you think you'll live beyond your actuarial life expectancy, then waiting as long as possible to start getting Social Security checks often leaves you ahead in the long run. But if you have reason to think you'll fall short of typical life expectancies, then taking the early money and running can often make more sense.

But there's another aspect to Social Security payments: timing. Depending on your other resources, Social Security may give you a source of income when you need it most, letting you avoid alternative ways to generate much-needed cash that could cost you a lot more in the long run.

Getting through a rough patch
One example of how Social Security can save you is when you need more time to ride out a bear market. Retirees in 2008, for example, emerged onto the scene of the worst economic environment since the Great Depression. Mainstream companies found themselves in dire straits, with Ford (NYSE: F  ) struggling to avoid the bankruptcy fate of its fellow Big 3 automakers, and Bank of America's (NYSE: BAC  ) share price collapsing under the weight of mortgage exposure gone wrong.

With cash at a premium, Dow Chemical (NYSE: DOW  ) , General Electric (NYSE: GE  ) , and countless other companies with long histories of dependable dividends had to cut their payouts to investors. That sent already-beaten-down shares plunging even further and left shareholders with a new challenge: how to replace their lost dividend income.

Without Social Security as an option, many retirees who owned those stocks and others like them might have had to liquidate everything. But with Social Security providing at least some income support, brave retirees were able to muscle it out for another couple of years. In many cases -- although certainly not all -- that was long enough to let those stocks rebound and give retirees a much better exit point to implement less aggressive investing strategies.

Money is money
Sure, making a smart Social Security decision depends on running a lot of numbers to figure out what works best for you. But one key to remember is Social Security's role as a safety valve that can help support you when all your other income sources fail you. If you keep Social Security in reserve for when you really need it, then you shouldn't be afraid to use it when the need actually arises -- especially if it fits in with the strategy you're using with your investment portfolio.

Along those lines, smart investing can give you more latitude to make the most of Social Security. Learn to be a better investor by reading the Fool's special report, "3 Stocks That Will Help You Retire Rich." Get your free copy today, while it lasts!

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Fool contributor Dan Caplinger is feeling optimistic about getting something from Social Security eventually. He doesn't own shares of the companies mentioned in this article. You can follow him on Twitter @DanCaplinger. The Motley Fool owns shares of Ford and Bank of America. Motley Fool newsletter services have recommended buying shares of and creating a synthetic long position on Ford. Try any of our Foolish newsletter services free for 30 days

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy is the smarter way.

Read/Post Comments (23) | Recommend This Article (72)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 24, 2012, at 3:08 PM, GETRICHSLOW2 wrote:

    Unless you are still earning an income, you would be foolish to not take the money and run at 62. The current health of the SS program along with the fact that we never know how many days we have left, you should get what you can now.

    If anyone in Washington ever gets the b-lls to fix the unconstitutional program, one of the first things to happen will be raising or eliminating the early payout.

  • Report this Comment On July 24, 2012, at 5:14 PM, djp928 wrote:

    The only sane way to plan for Social Security is to assume it's not going to be there when you go to collect.

  • Report this Comment On July 24, 2012, at 5:32 PM, Perry88 wrote:

    Ford (F, over $9) and Sirius (Siri, about $2) are 2 stocks that I had been watching for a number of years. When the market was a taking a hit I notice Ford selling at $1.16 and Sirius at 16 cents. My portfolio is looking better now that I bought in at that time.

  • Report this Comment On July 24, 2012, at 5:56 PM, dhanley15 wrote:

    Worthless article.

  • Report this Comment On July 24, 2012, at 6:19 PM, Ostrowsr wrote:

    I have an EXCEL spreadsheet that allows folks to crunch their numbers, no matter if they are 20 something or 50 something. Assumes they will get a minimal $600 Social Security kicking in at age 62. You can adjust results for your own situation. It also allows you to play "what if" games with your income and expenses. Best benefit is just reading the "inputs" so you can plan for future costs (do I need life insurance?, will I need Long Term Care insurance?, How much can I spend on vacation each year over the next 9 years without going into the poor house?)

  • Report this Comment On July 24, 2012, at 6:19 PM, hfogel wrote:

    Another possible option is that you can start collecting social security at an earlier age, then if your situation changes you can pay back what you have collected and start receiving higher payments because you are now older. Many people don't know about this option

  • Report this Comment On July 24, 2012, at 6:43 PM, Idahosehead wrote:

    For those of you lucky enough to recover your social security benefits take them as soon as possible and run for the hills!

    Quote from Paul Samuelson, Nobel Laureate Economist from Newsweek, February 1967, "The beauty of social insurance is that it is actuarially unsound. Everyone who reaches retirement age is given benefit privileges that far exceed anything he has paid in... Social Security is squarely based upon what has been called the eighth wonder of the world - compound interest. A growing nation is the greatest Ponzi Scheme ever contrived."

  • Report this Comment On July 24, 2012, at 7:22 PM, Spw225 wrote:

    I agree with others draw it at 62. The estimated insolvency date was 2041 in 2008. The latest date i've seen is 2033. The current 2% payroll tax reduction only speeds up the insolvency date. SSA no longer sends out paper annual ssa statements, which helps conceal awareness of individual benefit calculations. The old paper documents disclosed the estimated insolvency date and advised, for example, we would only get 75% of the benefit payment in 2041. There was also a study that indicates over time, total benefits received is about the same when you consider life expectancy.

  • Report this Comment On July 25, 2012, at 1:44 AM, binkenhiemer wrote:

    hfogel, the option of payback was discontinued in 2010.

    Ostrowsr, Does your model allow for the assets saved and the resulting compound interest on those assets? Example, if collect at 62 vs. 66 I have $X of assets (at least $14000 in my case). I for all intents and purposes accumulate the $14K plus the compound interest of the assets saved. In the case above, at age 86, I accumulate on the 65 column the same cash value as on the 62 column, BUT I have an additional $201K in assets and interest. The 70 scenario catches up the year before, BUT I have over $300K in saved assets and interest. Compounded destroys the 70 scenario if you have any assets you protect with taking the money earlier.

    At age 100, you would have $941K (claim age 62, SSN + Assets/interest) vs. $661K (claim age 66, SSN only). For the 70 scenario: 1,180K (claim age 62) vs. 669K (claim age 70). If you want to retire at age 62 and have the assets to do so, taking the money and running is the absolute best scenario.

  • Report this Comment On July 25, 2012, at 2:09 AM, Zombie111 wrote:

    Here's an alternative retirement plan practised by an elderly friend of my mother's. Have 19 children. When they are adults, spend the rest of your life living with one of them for one month. They pay the living expenses and her social security is hers. It has worked out better for her than many others I know who invested in shonky finance companies etc that went belly up (often due to fraudulent practices on the part of the directors). Many of them are lucky to get back 5 cents on the dollar. (New Zealand experience)

  • Report this Comment On July 25, 2012, at 9:26 AM, Snertie wrote:

    ..."one of the biggest assets every American has is Social Security."

    Seriously? Each year the date of insolvency creeps closer and closer. If you anywhere in your 40s or younger, I'd make the assumption that by the time you reach eligibility age, Social Security will have been converted into just another means-tested welfare program. This means that if you have your own savings, you won't get to start collecting Social Security until those assets are depleted, and then you'll be living at the poverty level. This means that I hope that I'll never have to collect. If I'm wrong about this, it means that I'll be able to afford a moderate vacation.

    I see Social Security as anything but an asset. It's a liability. Unlike my savings, there are no real assets backing up Social Security; it's entirely based upon a shrinking employment pool funding an ever-growing group of retirees. My bigger fear is that a future congress is going to start attacking our retirement funds to save it.

  • Report this Comment On July 25, 2012, at 1:28 PM, dar8000 wrote:

    The point of the article was that the increased payment from a deferred SS benefit can provide some insurance from possible future personal financial catastrophe.

    Thirty years ago when I was in my 30s the failure of SS was forecast and I did not expect to collect any. Surprise! While one should plan for SS demise, current forecasts may not be any more accurate.

    Based just on total income from SS, age 62 is not always the best starting age. My full entitlement age is 66 and 7 years of SS payments equal 11 years of SS payments from age 62. My health is good and I expect to live well past age 73. I am deferring SS payments until age 66.

  • Report this Comment On July 26, 2012, at 8:41 AM, winomaster wrote:

    Why the Democrats will never agree to privitized Social Security: Every citizen would realize that their retirement prosperity will depend upon the health of the economy. So, the citizens of this country will tend to evolve into fiscal conservatives. Those people tend to vote republican.

    The Democrat strategy is to try to get the population to become less independent and more like clients of the party...dependent upon democratic control of the government for their retirement and medical funding. But of course the money to fund these things came from you in the first place...unless you are one of those who have earned very little in your career.

    Government control of your retirement and medical tends to look good in the early part of ones life when your economic situation is naturally less established. But as you grow older an intelligent person shoud realize that they would have been better off to have maintained control of the assets that will fund their retirement.

    Politicians are simply too corrupt to be trusted with your money. They can't really even be trusted to police the financial system with common-sense safe-guards. Should it surprise anyone that they turned SS into a Ponzi scheme?

  • Report this Comment On July 26, 2012, at 3:08 PM, dunkim1 wrote:

    Take the money early-invest in high yield instruments. SS could stop or the market could tank, but current math says take the money and invest-probably mostly overseas.

  • Report this Comment On July 26, 2012, at 11:40 PM, steveelcpo wrote:

    Ok, the point of the article is to carefully weigh your choices and future benefits when deciding to start receiving Social (In)Security. The real issue is whether government is a good steward of your financial future and whether individuals can do a better job of planning for their own futures.

    Everybody knows that social security is heading for eventual insolvency and is not sustainable in its current form yet nobody does anything to correct the Ponzi scheme it has become. Congress is paralyzed and woe to the person who even suggests something needs to be done (Paul Ryan recently; Bush during his first term, among others); the liberals mobilize and that person is portrayed as "letting Grandma starve" or some such allegation. I keep hoping those who are under 30ish will start crying out for some type of reform such as what Chile did in the 1980's/1990's, but I don't think it will happen. We'll just keep driving toward the cliff....

  • Report this Comment On July 27, 2012, at 8:14 AM, TMFDarwood11 wrote:

    Social security will change. We don't know precisely when or precisely how. I've taken that position for the last 20 years and planned accordingly with lowered expectations of benefits in retirement. My attitude was "If I'm correct, my plan will be workable and if I'm wrong and achieve a higher benefit, that will be a nice bonus and some income I can spend on something other than necessities."

    At 45 I decided that attempting to project decades into the future for this entitlement benefit was a waste of time.

    Commencing at the age of 55 I've downloaded the SS calculator from and updated it every other year. At 62 I went into the SS office and got a confirming printout of my projected benefits at 63 and each year thereafter if I were to delay.

    Since 2000 I've plugged the numbers into my retirement planning and also created a custom spreadsheet which I updated periodically. Personal questions I wanted to resolve included:

    1. What was the best age in my case to begin taking benefits?

    2. What was the best age to stop working full time and what were the projected costs and benefits?

    3. What was the impact of continued part-time work?

    2. What was the implication of taking SS benefits earlier than 70. In other words, what was the real benefit to delaying and what would be the alternative source of income during the interim period between FRA and 70?

    3. What was the implication of taking benefits at full retirement age (66) and banking or investing a part of that benefit?

    In my case, I decided taking any SS prior to full retirement age would leave too much on the table.

    This year I reached FRA and continue working part-time (phased retirement) but am under the income level at which benefits are reduced because of my earnings. My spouse also works and so we can live off of our wages, because we maintain a debt free lifestyle.

    However, in my case, the question then becomes:

    If I took SS benefits at FRA, after paying taxes, is there a benefit to saving the excess and investing it as opposed to deferring it?

    That's an interesting question and the answer is typical of the somewhat unique situation we each face. I don't think there is any general rule. Current health, probable longevity, assets, current income from work, etc. all play a part.

    I have decided to keep working because to quote one of my doctors "When you stop, you drop." Besides, I earlier decided I wanted to work at least 50 years of my life. That includes real work which gets a paycheck. Thereafter I'll continue with serious volunteer work with accountabilities and responsibilities. I'm currently such a volunteer.

    I also want to comment that considering the present economy, I have a view of SS for those reaching FRA which is "The government will pay me not to work." Will that free up a spot in the labor market for a younger worker, as it did in 1936? I don't know. I work in industry/manufacturing and I suspect my permanent retirement may create a position for which there is no one properly qualified. I have some evidence of that. I'm a small business owner and my customers are having difficulties finding qualified and competent firms to do what I do. That's one of the reasons I'm still working and why I'm currently discussing projects for 2013.

  • Report this Comment On July 28, 2012, at 12:42 AM, PEStudent wrote:

    Yes, "money is money," but its need is not independent of time. Studies show that, if you've got you health care covered well, you need much less money after 80 than before 80.

    So do I want to take fewer overseas trips in my 60's when I can still climb Mt. Kilimanjaro or hike the Inca Trail to Machu Picchu and have a large excess of cash from income in my 80s? Of do I want to take several more major overseas trips in my 60's and have a smaller excess of cash from income in my 80s when long overseas trips will be less comfortable? I'm training for Kili and the Inca Trail.

  • Report this Comment On July 30, 2012, at 2:09 AM, bethannie68 wrote:

    Is it possible to collect 1/2 of one's spouse's SS at age 62 and then switch to collect one's own SS at age at 70?

  • Report this Comment On August 01, 2012, at 1:07 AM, Refire2012 wrote:

    When did Social Security become an entitlement?As far as "privatization"goes....S/S is already and always has been "private"......Since I started working and paying my Social Security "investments" over the last 45 years from my paychecks....that is my private fund


    And doing without that money for a good cause (my senior years)....that's private and personal.

    If they want to privitize it go ahead !!!! They can pay me what I paid in plus interest compounded (like any good savings vehicle)And I will be investing it for myself.

    Thank you...I enjoy reading your posts ...I am learning alot.

  • Report this Comment On August 01, 2012, at 3:55 PM, Sunny7039 wrote:

    The median value of financial assets held by families where the head-of-household is 55 to 64 years old is under $75,000.

    A family needs about 10 times that much to finance their own retirement, assuming they have no Social Security benefits and no defined benefit (i.e., "real") pension. And that anticipates a paid-for home or a frugal lifestyle or both.

    How do you expect people to live?

    Here's a clue -- if something is impossible, it really won't happen. For example, if the value of a home can't go on rising indefinitely, then it won't. If dot-com stocks can't go on rising indefinitely, then they won't. You know.

    As for what the average person can do, I do think that taking a more active role in staying healthy and fit, and staying in the workforce longer (which you can now do while collecting Social Security) are good ideas. Not enough, but a good start.

    What I would most like to see is an analysis of the decline in workforce participation and the increase in Social Security Disability rolls since 2008. Someone needs to take a hard look at this and start thinking about what it means, and what we (the rest of us) should be doing in light of these developments. Help us a little bit here!

    As for "privatizing" Social Security -- the 401(k) has been around since the 1980s. So, why are the vast majority of accounts far too small to sustain a lower-middle-class family in retirement? Until someone can answer that question, forget about risking more assets in the stock market and other private financial markets. It will be swallowed up, like everything else.

  • Report this Comment On August 04, 2012, at 4:26 PM, GUARAJAMAN wrote:

    I retired at 62, worked at walmart as a greeter and invested my total paychecks in reits & gold stocks I have done very well cruises travel etc. DO BOTH!

  • Report this Comment On August 06, 2012, at 6:11 PM, Sunny7039 wrote:

    Good for you, Guarajaman!

    There are those who would consider such work "beneath them."

    Most of those people are called "debtors."

    (I do my best to avoid them. I'm a "saver," after all. We just don't see eye to eye. :)

  • Report this Comment On August 06, 2012, at 6:14 PM, Sunny7039 wrote:


    The word "entitlement" means something different in the law than in ordinary conversation. In law, it's a term of art, and it refers to something you are legally entitled to -- not something you feel you deserve but haven't really earned.

    From that perspective, Social Security sure is an "entitlement." It is something you've legally vested and earned.

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