Deciding when to claim Social Security benefits is, without a doubt, one of the most confusing and complex pieces of the entire retirement planning process. In fact, most individuals should consider hiring a professional to get advice on retirement planning in general, and Social Security benefits in particular. Here are some basic guidelines to consider as you decide when to claim Social Security:
Monthly payments vary a lot. You can start taking Social Security benefits at age 62, which shouldn't be confused with age 59 1/2, at which you can take penalty-free withdrawals from tax-advantaged retirement savings accounts like IRAs and 401(k)s. But taking the benefit as soon as you can will lower your monthly payment amounts throughout retirement.
The government attempts to even out Social Security payments over time by basing payments on the average life expectancy. If you take benefits at 62 and live until 77, you'll get about the same amount of money as if you took benefits at 70 and lived until 77. If you live longer than average, though, your total benefits can vary dramatically depending on when you start taking them.
Figuring out exactly how much you can get per month from Social Security is the easy part. The official Social Security Administration retirement estimator can tell you about how much you can expect to get based on your actual earnings. The nearer you are to retirement, the more accurate this calculator will be, and it can show you your retirement earnings based on different scenarios. For example, a person who could get $750 a month at age 62 could get $1,000 a month at 66 or $1,320 a month at 70.
It depends, in part, on your retirement savings. When deciding when to claim Social Security, you'll want to factor in your retirement savings, either in the form of pensions, tax-advantaged accounts or other investments. In some cases, it's better to withdraw from your retirement savings while delaying Social Security. In other cases, it makes more sense to draw on Social Security first, while leaving your retirement savings largely alone until you're older.
Keep in mind that many of your retirement accounts, including the 401(k) and traditional IRA, will be subject to required minimum distributions. So you'll have to withdraw at least some of the money by the time you're 70 1/2.
Those who have enough investments to cover their expenses in early retirement so they can delay taking Social Security are better off waiting to draw on Social Security, according to calculations by the Schwab Center for Financial Research. On the flip side, Social Security alone may not be enough for you to cover your expenses later in life, so you don't want to set yourself up to run out of the money you've saved, either.
Your break-even age. Life expectancy has a lot to do with when it's best to take Social Security. As noted above, the government tries to balance Social Security payments so that whether you take them early or delay them, you'll get about the same amount of money by age 77, an American's current life expectancy.
However, if you expect to live a lot longer than 77 or die much earlier than that, you may benefit from taking your Social Security later or earlier, respectively. For instance, if you wait to take Social Security at your normal retirement age of 66, as opposed to age 62, you'll only have to live until 77 or 78 to break even, according to Schwab calculations. Break-even ages rise the later you wait to take Social Security.
Consider your decisions as a married couple. There are several different strategies for maximizing Social Security checks as a married couple:
--Claim and suspend. If one spouse has made much more than the other over a lifetime and the higher-earning spouse wants to keep working, this can be a good strategy. Basically, the higher-earning spouse will claim Social Security benefits at full retirement age, but suspend payments indefinitely. The lower-earning spouse can then claim a spousal benefit, while the higher-earning spouse's suspended payments increase his or her Social Security benefit over time.
-- Claim and claim again. If both spouses have made similar salaries over their lifetimes, this strategy can be helpful, especially if you can handle lower checks during the early retirement years. For this strategy, both spouses retire. One takes Social Security, while the other claims spousal benefits, putting off his or her own Social Security withdrawals until 70, significantly boosting the second spouse's eventual Social Security checks.
--Maximizing survivor benefits. When planning Social Security as a married couple, it's important to get the surviving spouse the most money possible after one spouse dies. Waiting until full retirement age to collect Social Security will increase your spouse's survivor's benefit, so it's usually a good idea to wait until at least full retirement age to claim benefits.
Deciding to keep working. If you want to take Social Security benefits while still working part time or full time, you can. But you will get reduced benefits if you make over a certain amount - around $15,120 for 2013. For every $2 you make over that amount, your Social Security benefit will be reduced by $1. Once you reach full retirement age, your benefit will be reduced by $1 for every $3 you make over $40,080.
Some individuals choose to take Social Security payments while they're still working, so that they can invest the extra money to hopefully get a better return. This can work out in your favor, if the market and your investing strategy give you an excellent return. But this is a risky proposal, and most investment professionals don't advise it unless you can really afford to lose the money.
The bottom line. When it comes to deciding when to take Social Security benefits, the bottom line is that it's a highly personal decision. It depends on whether you're single or married, how long you might live, whether you want to continue working and how much you've already saved for retirement.
The key is to understand all your choices, and how those various choices will affect your overall income potential during retirement. It's often helpful to find a financial adviser you trust, and work with that adviser to decide when you should take Social Security benefits based on all of these different factors.
Rob Berger is the founder of the popular personal finance blog, the Dough Roller.