Getting the Most from Social Security

This week, the federal government announced that the cost-of-living increase for federal retirees and Social Security recipients will be 1.7 percent in 2013. That’s not a lot of money, so it may cause some retirees and those contemplating retirement to wonder about how they can get the most out of their benefits.

One thing that those retiring under the Federal Employees Retirement System can do to maximize their income is to carefully consider the best time to claim Social Security benefits. There are a lot of variables involved, so it helps to have some guidance. One user-friendly book I’ve found is A Social Security Owner’s Manual. It provides a guide to help for couples decide whether to claim Social Security at their first opportunity -- when they turn 62 -- or to wait.

If you wait past your full retirement age (65-67, depending on your year of birth), you can get a benefit as much as 76 percent bigger than the amount payable at 62, and 32 percent more than the benefit available at your full retirement age.

Spousal Scenarios

Let’s look at a hypothetical scenario involving a couple that shows how delaying Social Security can result in higher lifetime benefits. This scenario does not take into account future cost-of-living adjustments or cases where there is a spousal benefit payable on the work record of the higher earner while both individuals are living.

Spouse with higher lifetime earnings:

• Age 62: $1,500
• Age 66: $2,000
• Age 70: $2,640

• Age 62: $750
• Age 66: $1,000
• Age 70: $1,320

If both spouses claim their Social Security benefit at 62 and live to be 95, they would receive $594,000 (from the higher earner) and $297,000 (from the lower earner), for a total of $891,000. But if the higher earner died at 72 and the lower earned lived to be 95, the total income would be $684,000 -- $207,000 less than if they had both lived to 95.

What if they both waited until they turned 70 to claim benefits, and then lived to 95? The higher earner would receive $792,000 and the lower earner $396,000, for a total of $1,188,000. But if the higher earner died at 72 and the lower earner lived to 95, the benefit would add up to $823,780.

If your head isn’t already spinning, consider this scenario: The higher earner waits until age 70 to claim benefits and the lower earner files at 62. If the higher earner lives to 72 and the lower earner lives to 95, here’s how it would play out: the higher earner would receive $63,360 in benefits and the lower would eventually take in $818, 640. Their total income would be $882,000.

Strategies

Here are my conclusions on figuring out the best Social Security claiming strategy:

• The only way to know the perfect time to claim your benefits is to know when you are going to die. I don’t know about you, but I’m not sure I want to know the exact date.
• Delaying your Social Security benefit might mean depleting another asset such as your Thrift Savings Plan account. Since the traditional TSP (as opposed to the new Roth TSP) is a tax-deferred account and you aren’t required to start withdrawals until age 70, it may be better to take Social Security benefits early since they are at least partially tax-free.
• If you are still working at 62, remember there’s is an earnings limit that will reduce your Social Security benefit by $1 for every $2 that you earn above the limit. For 2012, that limit is $14,640 per year. The limit applies to wages and salaries. It doesn’t count retirement income and investment income. If you’re still working full time, then you probably won’t need to start using your retirement savings or collect your Social Security benefit. By continuing to work, you will increase all of your retirement benefits, so you’ll have a more comfortable retirement. Here’s a fact sheet on these issues.
• If one spouse is more financially dependent than the other, be sure to consider what will happen if that spouse is the one to survive. Did the more financially secure spouse provide adequate survivor benefits, life insurance, and possibly delay their own Social Security?
• If one spouse is covered under the Civil Service Retirement System, then Social Security benefits are computed differently. Here is a resource and calculator to evaluate these differences.

Remember, another solution is to continue doing work you enjoy, while making sure you have time to also enjoy the other things that life has to offer such as travel, spending time with family and pursuing hobbies. This way, you can continue providing income to your household and build up your benefits.

In any case, it pays to think ahead about various scenarios. As Thomas Edison said, “Good fortune is what happens when opportunity meets with planning.”

Correction: The original version of this column contained a math error in the second example under "Spousal Scenarios" regarding the total amount both spouses would receive if they waited until they turned 70 to claim benefits, and then lived to 95. The column has been updated to correct the error.