Optimizing Social Security: It's More Complicated Than You Think

This article, one of a series about Social Security benefits written by Christine Benz, was originally featured in 2010, but in case you missed it, we are re-featuring it as part of our Retirement Portfolio Week. 

Compared with managing your retirement assets, your Social Security benefits might seem like an oasis of simplicity and stability. Overseeing your investment portfolio, even if you choose to keep it fairly simple, requires at least a passing familiarity with asset allocation, asset location, and sequence of withdrawals, all of which are complicated subjects unto themselves. The key decision about Social Security, by contrast, is what date to begin using it. In the past, that decision usually hinged on a person's retirement date: Those retiring early started receiving Social Security benefits as early as 62, while those retiring later waited to receive benefits.

But an expanding body of research has highlighted the benefits of delaying receipt of Social Security, showing that doing so can dramatically increase a person's benefit during his or her lifetime. That, in turn, argues for making Social Security benefit optimization as much a part of the retirement-planning discussion as is whether to relocate, what investment assets to buy, or when to retire in the first place.

Social Security planning is a complicated topic, but here are some of the key variables to consider.

Desired Retirement Date/Income Needs
These two variables go hand in hand: The longer you continue to work, the higher the Social Security benefit level you can expect to receive. For example, a T. Rowe Price study that appeared in the June 2010 issue of T. Rowe Price Investor magazine compared the anticipated Social Security benefits for a married couple, both 61 years of age. One spouse earns $53,000 and lives to be age 95, while the other earns $84,000 and lives to age 80. The study showed that the cumulative Social Security benefit would be more than $600,000 higher if the couple were to defer receipt of benefits until age 70 versus beginning Social Security benefits at age 62. (T. Rowe's assumptions deal with pretax dollars and include an inflation adjustment.)

That big swing factor reflects the fact that you'll be penalized for beginning receipt of Social Security prior to what's called your normal retirement age (66 or 67 for most individuals of the baby boom generation) and you'll receive credit for delaying.

Of course, many individuals don't have the luxury of delaying Social Security; health problems or layoffs may require them to begin collecting Social Security benefits as early as they possibly can. (The economic downturn has hit the over-55 set disproportionately.) Another consideration is whether delaying Social Security would require a person to draw heavily on his or her investment portfolio early on in retirement, thereby running the risk of depleting it prematurely. Such a scenario could offset any benefit the individual gained by waiting to take Social Security.

But if your Social Security start date is at all flexible, it pays to consider pushing it as far into the future as you can. The Social Security Administration's Retirement Estimator can help you see, in dollars and cents, how your benefits will vary based on different retirement dates. The annual Social Security statement you receive in the mail will also show your expected benefit under three different scenarios: If you begin to collect Social Security at age 62, if you wait until your normal retirement age, and if you delay receipt until age 70).

Health/Longevity Considerations
The decision to defer receipt of Social Security benefits is particularly beneficial for those who expect to live a long time. In exchange for waiting until normal retirement age or beyond, such individuals can expect to receive a higher income, and the benefit of that higher income is especially acute if it's stretched over many years. So if longevity runs in your family, deferring receipt of Social Security benefits until your normal retirement age or beyond likely would be a good move. On the flip side, if you've had significant health problems and have concerns about your own longevity, you're better off taking Social Security sooner rather than later.

One Life or Two?
While Social Security planning for one person is a fairly straightforward matter, doing so for a married couple is a lot more complicated. The spouses are apt to have different ages and different income histories and anticipated retirement dates, as well as distinct health and longevity profiles. A further wrinkle is that upon the death of the first spouse, the surviving spouse is eligible to receive the deceased spouse's benefit rather than his or her own (assuming the deceased spouse's benefit was higher).

In an effort to maximize income for the lower-earning spouse, experts often recommend that the higher-earning spouse defers his or her Social Security benefits' start date until age 70 while the lower-earning spouse can start receiving benefits at age 62. (You may see this strategy referred to as the 62/70 split.) Alternatively, a spouse can claim a spousal benefit; doing so allows the spouse to claim 50% of the partner's benefit instead of his or her own benefit.

Are your eyes glazing over yet? Obviously, this stuff can get complicated, so this is one case where it might be beneficial to consult with a financial advisor who's experienced in navigating the Social Security maze. The aforementioned T. Rowe Price study also provides helpful examples of how married couples can maximize their Social Security income over both lifetimes. (All of the scenarios show that having at least one spouse delay receipt of Social Security until age 66 or preferably even age 70 has a big impact on the couple's lifetime benefits.)

Work Plans
Given that today's retirees and preretirees are healthier than their forebears were at the same age, as well as the fact many haven't saved enough, working at least part-time is bound to be part of many individuals' in-retirement strategies. Doing so can be highly beneficial in both financial and mental-health terms; it can also help cover gaps in health insurance coverage for those don't yet qualify for Medicare. But it's also worth noting the interplay between work and Social Security benefits. Those who begin taking Social Security prior to their normal retirement age will see their benefits docked significantly if their incomes rise above a certain level; this publication discusses some of the specifics.