The Right Time to Take Social Security

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Like it or not, Social Security is the most important financial resource for millions of Americans. With employer pensions becoming a thing of the past and most people having woefully little set aside for their own savings, making the most of Social Security will make or break a huge number of retirees both now and in the coming years.

What few realize, though, is just how many choices you have with Social Security benefits. The right choice can stretch your benefits a lot further, while common missteps can leave you with far less than you might have gotten if you'd done just a little extra homework. To make the best choice for you, it's critical to understand what's at stake.

The ins and outs of Social Security benefits
For a program with such a simple mission, Social Security is extremely complicated. For instance, even coming up with your baseline monthly payment is hard to do, as you have to take your 35 top-earning years and adjust them for inflation to come up with average earnings. From there, a progressively tailored formula determines your standard monthly benefit.

But that's only the starting point, because you also have flexibility in deciding when to start taking Social Security. At any point between age 62 and 70, you can claim your benefits. But the earlier you take them, the smaller your payments will be. The longer you wait, the more you'll get paid each month. That leaves you with a huge potential range for benefits, with monthly payments anywhere from a quarter less than your baseline benefit if you start at age 62 to a third more if you wait until age 70.

If you're married, benefits calculations get even more complex. That's because as a spouse, you have the right to take Social Security payments based either on your own salary history or on your spouse's salary history. Typically, you can get half of whatever your spouse is entitled to if you claim a spousal benefit. That opens the door to some intriguing strategies, but they require careful thought.

All in the family
In making decisions about your benefits, it's incredibly important to consider not just the immediate financial impact but also how it affects future payouts as well. Also, because the decisions you make can affect your spouse or other dependents if you have them, you have to take their finances into consideration in making the best choice you can for your entire family.

Among the available strategies are the following:

  • For spouses who both have substantial earnings histories, having one spouse file for Social Security early lets both spouses claim benefits -- one based on his or her own benefit and the other based on a spousal benefit. Later, the second spouse can claim his or her own benefit, which should be higher because of the delay in claiming until a later age.
  • In a one-income household, the working spouse can use what's called the "file and suspend" strategy, filing for benefits to establish a spousal benefit for the other spouse but immediately suspending payments for the working spouse's benefit. That allows the clock to keep running for the working spouse, leading to higher monthly payments at whatever later age the working spouse chooses to start collecting them.

Of course, deferring benefits requires replacing that money with other income. Where can you get it? Until the past five years or so, retirees and near-retirees had been able to expect rates of 4% to 5% from Bank of America (NYSE: BAC  ) , JPMorgan Chase (NYSE: JPM  ) , and Citigroup (NYSE: C  ) . Now, those institutions have prime rates below those levels, leaving savers with few opportunities to earn income.

Instead, retirees have turned to dividend stocks and funds. With iShares Dow Jones Dividend (NYSEMKT: DVY  ) and Vanguard Dividend Appreciation (NYSEMKT: VIG  ) offering better yields than banks can offer on CDs, you can go that route to get more income from your portfolio, leaving Social Security for later with a higher payout.

Don't penalize yourself
The other thing to remember is that if you're still working at age 62, don't expect to file for Social Security early and get a windfall. Social Security rules start taking away your early retirement benefit once your annual earnings go above around the $14,000 mark, reducing your payout by $1 for every $2 over the limit. Many workers may find that they'd get nothing by filing early as long as they keep working.

Of course, it's impossible to perfectly manage your Social Security benefits to get the absolute highest amount possible, given the uncertainties in life expectancy. But by keeping at least these basic ideas in mind, you can increase the chances of taking Social Security at the right time for you.

Once upon a time, banking stocks made great dividend plays for retiree income. Now, though, they're just a shell of their former selves. To learn more about the most-talked-about bank out there, check out our in-depth company report on Bank of America. The report details the banking giant's prospects, including three reasons to buy Bank of America and three reasons to sell. Just click here to get access.

Tune in every Monday and Wednesday for Dan's columns on retirement, investing, and personal finance. You can follow him on Twitter @DanCaplinger.

Fool contributor Dan Caplinger owns warrants on JPMorgan Chase and shares of Vanguard Dividend Appreciation. The Motley Fool owns shares of Bank of America, Citigroup, and JPMorgan Chase. 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 Motley Fool has a disclosure policy.

Read/Post Comments (12) | Recommend This Article (33)

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 November 05, 2012, at 8:31 PM, motleymarty wrote:

    All well and good, but think about what happens when you receive a medical DX that forces you to take SS far too early. Then what? You'd better be able to invest in stocks, especially with interst rates below the prime rate, or you'll be homeless or worse...

  • Report this Comment On November 06, 2012, at 9:30 AM, Chontichajim wrote:

    You need to be very careful how you time taking spousal benefits before switching to your own in a two income household. If you take a spousal benefit before being full SS age (66), you create limitations on your own future benefit.

    For our houselhold taking the lower income earners SS at 66 and the higher income earner SS at 70 looks best for us. Of course you never really know until after you are dead.

  • Report this Comment On November 09, 2012, at 12:18 PM, Pharcyde1 wrote:

    Thank you Chontichajim for your last comment.

    I got a real chuckle out of it. But it is true!!

  • Report this Comment On November 09, 2012, at 12:29 PM, jschwartzy wrote:

    One aspect to Social Security benefits that is little known: If you have been disabled and have collected disability benefits, you canNOT take 1/2 of your husband's social security check if he works beyond 66. You will only be given 1/2 of what he made at 66. That's 4 years of benefits you miss out on because you have been disabled.

  • Report this Comment On November 09, 2012, at 4:05 PM, BSammee wrote:

    My husband plans to continue working and to delay taking benefits until he's 70. It's best for me to claim spousal benefits because my own income record is so much lower than his income.

    I was told by a Social Security rep that ANY spousal benefit TOPS OUT at 1/2 of the other's benefit accrued at age 66 -- REGARDLESS of whether their spouse stops working at 66 or works until 70. In other words, 1/2 of his age 66 benefit calculation is the most I can EVER get as a spousal benefit, even though he continues to accrue his own benefits for another 4 years. Since my annual spousal benefit will not increase by my waiting until I am 70, I'm claiming at age 66 (via my husband using the "file and suspend" method) to receive those extra 4 years of SS income.

    So, jschwartzy, I don't believe your disability payments had anything to do with your restriction. It apparently applies to ANY spousal benefit calculation.

  • Report this Comment On November 09, 2012, at 4:07 PM, MCCrockett wrote:

    The spousal benefit is a strange beast. Like the retirement benefit, its value is decreased when claimed before full retirement age. Unlike the retirement benefit, it does not increase in value after full retirement age.

    At full retirement age, the maximum value of the spousal benefit is 50 percent of the "primary" spouse and is capped by the lesser of the "primary" spouse's retirement benefit or what the "primary" spouse would have received at full retirement age.

    My wife will be 66 in December. She can't claim the spousal benefit until I claim my retirement benefit. I turn 68 in January and will start my SSA retirement benefit in February.

    As a result, the earliest that my wife's spousal benefit can begin is in February. Her maximum benefit will be 50 percent of what I would have received had I retired at 66.

  • Report this Comment On November 09, 2012, at 4:32 PM, MCCrockett wrote:

    While not related to Social Security spousal benefits, I learned of an interesting provision of the Pension Protection Act of 2006 for those covered by an employer's defined-benefit retirement plan.

    My employer defines 65 as their retirement age and the retirement benefit is based on a 30 year payout period.

    If you delay retirement and work past the retirement plan's defined retirement age, the Pension Protection Act of 2006 requires that the monthly benefit be adjusted to reflect the shorter payout period.

    I will be retiring at age 68. Based on the Acts provisions, I must receive the same amount of money in 27 years as I would have in 30 years had I retired at 65.

    My rough estimate is that this will be a 10 percent increase in my monthly retirement benefit. I haven't seen the actuarial results yet.

  • Report this Comment On November 10, 2012, at 10:37 AM, WorldWarThree wrote:

    It seems to me, those who claim that Social Security should not be collected before age 66, and best wait to age 70 are usually people with successful careers, like their job and are respected in their field. This is what I will refer to as 'ideal conditions'. There are more and more workers who function in less than ideal conditions. Workers may find their jobs arduous, pay is frozen with shrinking benefits, stressful, no appreciation for a job well done and the management just wants them gone. People simply just cannot hang on 'till age 70.

  • Report this Comment On November 11, 2012, at 6:00 AM, Didoaeneas wrote:

    How would it work for me? No spouse. No dependents. Earned income as a private school teacher. (HA!, in other words). Like my job, but I AM TIRED. When is MY ideal time to start taking SS?

  • Report this Comment On November 11, 2012, at 11:19 AM, titus103 wrote:

    I started claiming SS at 63. after I reached 66, I was able to keep my full benefit. Since I pay taxes in excess of my last 35 yrs earnings, SS has to add that payment to my SS in the form of increased benefits . When I started receiving I was getting 1450 net. I now receive 1840 net. 2013 will probably be my last year to work My wife can work and will be receiving what I use to make , so her benefit will go up.

  • Report this Comment On January 28, 2013, at 8:58 PM, whitemice wrote:

    For those with a public pension, who have not paid in to Social Security their entire career, but only part of it, the rules are even more arcane. There are two provisions, called windfall elimination and government pension offset , which result in limiting or eliminating entirely any benefit from social security. Though I worked for 27 years in a job in which I paid in to social security the maximum each year, I also worked 32 years in government. As a result, I do not believe that I will receive a SS pension benefit. My wife worked over 25 years in a Social Security job, but may have her benefits reduced as a result of my pension. Who can explain how all of this works?

  • Report this Comment On April 09, 2013, at 1:22 PM, BenScrewed wrote:

    My situation is a little different than those previously posted. I am 61 and my wife is 13 years younger than me. We have been married for 22 years and most of that time she either didn't work or worked part time. At what age can she claim SS benefits based on my work history? I plan on changing from full time to part time at age 66, start drawing SS, and continue part time work until 70 (if able). So, at what age can my wife benefit from my SS benefits? 53 (i'm 66); 62 (i'm 75); 66 or 67 (i'm 79 or 80)... Suggestions!

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