Consider Your Social Security Strategy

The following is part of our 21 Days to Improve Your Financial Life special report.

As more and more workers approach and enter retirement without the benefit of pensions, the lifetime income stream of Social Security--and the enlarged benefits that can be obtained with savvy benefits-claiming strategies--has received newfound attention.

Laurence Kotlikoff, Philip Moeller, and Paul Solman's book about Social Security claiming strategies, Get What's Yours, sold more than 300,000 copies upon its release in 2015. Thanks in part to the book's popularity, and the light it shone on arcane Social Security strategies, Congress closed the loopholes that effectively put an end to the "file and suspend" and "restricted application" strategies that married couples had effectively been using to enlarge their benefits.

Yet even though those strategies are largely off limits, giving due attention to your Social Security strategy is apt to be one of the most important things you can do to ensure the success of your plan. While more than a third of workers claim Social Security benefits when they're first eligible, at age 62, a growing percentage of workers is waiting until mid-60s or even later.

As you think through your approach to claiming Social Security benefits, here are the key steps to take.

Step 1: Create a Social Security account and check history. Remember when Social Security used to periodically mail a statement enumerating your projected benefits and earnings history, dating to your first high school job? Those days are long gone; Social Security only mails those paper statements to a subset of individuals. Instead, you'll need to open a My Social Security account on Social Security's website; once you've done that, you can check that Social Security has your correct earnings record and project your benefits using your actual work history. You'll need some personally identifying information to set up the account; if you don't want to set up your account online, you can visit a local Social Security office to help you do so.

Step 2: Check your earnings history. After you've created a My Social Security account, you can then take a look at your statement. You can see your estimated benefit at full retirement age, as well as if you filed at age 62 or waited until age 70. In addition, you can see projected benefits if you were to become disabled, as well as the benefit amounts that your survivors would receive if you predeceased them.

Your statement also depicts your earnings record; scrutinize it to ensure that it's correct and contact the Social Security Administration right away if you spot any problems. Your Social Security benefit is calculated by looking at your highest-earning 35 years, so any misinformation could affect your eventual benefits if not corrected.

Step 3: Assess benefits if filing at various points in time. Your Social Security statement provides a good starting point for assessing when to begin taking benefits; you can see that benefits are sharply curtailed if you file when you're first eligible, at age 62. You can also see that benefits pick up sharply--to the tune of roughly 8% per year--for every year you delay past your full retirement age. Your statement also depicts your projected benefit if you start at your full retirement age. Full retirement age is a moving target: You can see how it changes based on birth year here.

The guaranteed benefits increase of 8% per annum for delaying past full retirement age is impossible to beat with investing in the market. Your investments could probably return 8%, of course, but such a return would most certainly not be guaranteed. Right now cash instruments are yielding a bit more than 1% if you're lucky. That's why retirement experts so often urge pre-retirees to consider delaying by even a few years. (There's no benefit for delaying past age 70, however.)

That said, delayed filing isn't for everyone, and filing at age 62 can make sense in certain situations. For example, if a combination of family longevity or your own health history suggests that you are apt to have a shorter-than-average life expectancy, claiming benefits sooner can make sense. Doing so will also affect spousal and survivor benefits, however, so get a second opinion before proceeding down this path.

Because the decision about when to take Social Security can be nuanced, Morningstar.com contributor and Social Security expert Mark Miller suggests using online tools such as Social Security's Retirement Estimator to experiment with different claiming dates. Alternatively, more and more financial advisors are providing guidance on Social Security claiming strategies.

If you're far from retirement age, think twice before assuming that you'll receive no Social Security benefit because you expect that there will be changes to the program before you reach retirement age. Karen Wallace explored how young people should factor Social Security benefits into their plans. (It's important to recognize that taking benefits all the way down to zero results in heroic savings needs.)

Step 4: Take special care if you're part of a married couple. As noted above, Congress did away with two of the most popular claiming strategies for couples--file and suspend and restricted application--in 2015. Yet married couples still have options for boosting their lifetime benefits from the program and should conduct Social Security planning in tandem. To do so, they must consider their joint life expectancy, their separate earnings histories (if applicable), as well as spousal and survivor benefits. As Miller notes in this article, despite the demise of more sophisticated claiming strategies for couples, married couples usually benefit when the higher earner delays filing to earn delayed credits.

Step 5: Take into account implications for the rest of your plan: working longer, portfolio withdrawals, and taxes. You can't plan Social Security in a vacuum. Even if delayed filing looks like the right strategy for you, explore what that would mean from a cash-flow standpoint. Where will you go for cash flow in the years leading up to your Social Security start date? Once you've arrived at how much income you'll need in retirement--an exercise we covered as part of our discussion of retirement portfolio withdrawals--it's valuable to sketch out the sources of your cash flow on a year-by-year basis. For those delaying Social Security, income from work and/or portfolio withdrawals will necessarily contribute a larger percentage of early retirement cash flow than they will later on, when Social Security is in place. In addition, bear in mind the tax aspects of Social Security as well as the implications for Social Security benefits if you're still working. This article explores the impact of earned income on Social Security, while this one delves into Social Security and taxes.