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Get the Most From Social Security

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With volatile stock markets making retirees and near-retirees worried about their retirement nest eggs, Social Security is more important than ever as a stable, secure source of income during your golden years. Given how uncertain the financial markets are right now, you can't afford to make any mistakes in getting as much out of your Social Security benefits as you can.

A nasty situation
The recession has knocked those saving for retirement for a big loop in recent years. As if the market's meltdown weren't enough, many workers who are fortunate enough to have pension benefits from their jobs are seeing them cut or frozen, meaning that they would accrue no further credit toward their pension benefits. In recent years, hundreds of companies have cut back on pension benefits for workers. And the trend has continued: Just last year, certain employees of Principal Financial (NYSE: PFG  ) and Sunoco (NYSE: SUN  ) saw their pension plans frozen. Meanwhile, Kraft Foods (NYSE: KFT  ) , which recently acquired Cadbury, has taken heat due to its handling of a future pension freeze that could potentially affect Cadbury workers' benefits.

Even worse, the situation is starting to spread. Public-sector job benefits, once seen as a safe haven for strong pensions, are beginning to feel political pressure as those in the private sector look longingly at the generous payouts many retired public workers receive. It's easy to foresee a future in which Social Security is the strongest part of a retiree's income -- and given Social Security's own problems, that isn't necessarily saying much.

Consider your options
One of the most important decisions you can make is when to start taking your Social Security benefits. You can start drawing benefits as early as age 62, but for those retiring now, the normal retirement age is 66. If you take benefits at age 62, you have to accept a 25% reduction in your monthly benefit. Conversely, if you postpone taking benefits after age 66, then you get a bonus of 8% for every year you wait, up to a maximum of 32% at age 70.

If you're single and don't have a former spouse collecting benefits based on your job record, then you have a pretty simple life expectancy calculation to justify your decision. The longer you expect to live, the more you'll benefit from waiting for larger payouts. If illness or medical conditions suggest that your life expectancy is below average, however, you'll typically find that receiving benefits as early as possible gives you the best lifetime results.

When you add family considerations to the mix, things get complicated in a hurry. Here's the thing: your spouse has the option of taking a Social Security payment based on one-half of your own monthly payment, if that yields a larger amount than the payment based on your spouse's own work record. What that means is that if you take Social Security early, you don't just reduce your own benefits, you may also reduce your spouse's. For those with dependent children or parents entitled to benefits, the same considerations apply.

In addition, regardless of your family status, another thing to keep in mind is that you can forfeit some of your Social Security benefits if you're still working and earn above a minimum threshold amount. Even fairly modest incomes from part-time work can lead to partial or complete loss of your benefit, making it much smarter simply to wait until full retirement age (or when you quit) to take monthly payments.

Finally, taxes play a role in the Social Security decision. Those with incomes above certain levels have a portion of their monthly payments included as taxable income on their tax returns. That makes careful tax planning important, as boosts in income levels can snowball into having more of your Social Security taxed as well.

Work it out
If all this sounds too complicated to figure out on your own, there's help available. Social Security is one of the most popular topics of discussion among members of the Fool's Rule Your Retirement community, which is why you'll find that the service offers a number of resources for those trying to figure out their own benefit situation.

Social Security has been a rock for retirees for decades. By including all the factors in your decision-making process, you'll ensure that you'll get the most you can for yourself and your family.

Tune in every Monday and Wednesday for Dan's columns on retirement, investing, and personal finance.

Fool contributor Dan Caplinger still thinks he'll get something from Social Security. He doesn't own shares of the companies mentioned in this article. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy never retires and keeps on working for you.


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Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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