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Find Social Security sweet spot, including the 'do-over' option

Talk to people over age 70 and, chances are, they'll tell you they started taking Social Security benefits early. But talk to financial advisors, and they'll say doing so is not necessarily the wisest decision.

"If you can delay taking the benefits, then do," said Bill Schretter, certified financial planner with Raymond James Financial. "Don't just automatically do what other people do."

Social Security
Nick M. Do | E+ | Getty Images

The reason is simple. Eligibility for Social Security benefits starts at age 62. But full retirement age, as viewed by the government, ranges from age 65 to 67, depending on your year of birth. And if you start taking benefits before your full retirement age, your monthly check will be reduced.

For illustration purposes: Assume your full retirement age is 66, at which point you're due a monthly benefit of $1,000. If you choose to start receiving checks at age 62, your monthly payment will be $750, a 25 percent reduction. If you wait until age 70, your benefit will be $1,320—132 percent of that $1,000. And if, say, that $1,000 were $2,000, waiting until age 70 would mean $2,640.

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"There can be a huge difference," said Mike Prendergast, a certified financial planner with Altfest Personal Wealth Management. "And remember: You get cost-of-living increases, so delaying taking benefits until age 70 means those increases are based on a bigger monthly payout."

Of course, there are valid reasons to start taking money before your full retirement age. If you cannot cover your daily living expenses, for instance, taking benefits early not only makes sense but can be necessary.

Additionally, a person's physical health and expected longevity comes into play. Advisors say taking a look at your own health and your family history is a good place to start for determining this.

Average life expectancy now stands at 76 for men and 81 for women. If you are generally heathy and your parents lived well into their 80s or 90s, chances are you, too, will enjoy a longer life. On the other hand, if you have a terminal illness, unhealthy lifestyle or a genetic predisposition toward heart disease and the like, there might not be much reason to wait.

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"If you are not healthy and don't have a long life expectancy, it might make sense to take it early," Schretter at Raymond James Financial said.

Data from the Social Security Administration shows that about 1 in 3 65-year-olds today will live to age 90, and more than 1 in 7 will live to age 95.

Another factor to consider is your employment situation. If you continue working when you take early benefits, you need to be aware it comes with a penalty.

"People who do that might be in for a very unpleasant surprise," Altfest's Prendergast said.

If you continue working while collecting Social Security early, the government will withhold $1 in benefits for every $2 in earned income above a certain limit. For 2014, that ceiling is $15,480. Additionally, in the year you reach full retirement age, the government will deduct $1 for every $3 you earn above a limit—$41,400—but the reduction is only made in the month before you reach full retirement age.

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However, continuing to work can mean a higher monthly benefit when you reach your full retirement age, because your benefit is based on your highest-earning 35 years of work.

Also, if you do elect to take benefits early but then change your mind, the government gives you one year to do an about-face.

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"If, say, you start taking benefits at 62 and then six months later wonder, 'What was I thinking?' You can do a do-over," explained Prendergast. "You can pay back the benefits you received, and then it's as if it never happened."

He advises, however, that if you do change your mind, start the do-over process several months before the one-year mark due to paperwork involved and the process.

Under the rules, retirees may withdraw their Social Security applications only once and only within 12 months of first receiving benefits.

For married folks, the choices can get a bit more complicated.

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"The biggest thing I see with couples is, they are unaware of how to maximize their benefits over the long term," said Mary Ballin, a certified financial planner with Mosaic Financial Partners.

For instance, there is something called "file-and-suspend." This strategy requires both spouses to delay filing until full retirement age. At this time, the higher earner files but suspends his or her benefits until age 70 to continue earning and letting the benefits grow.

"Social Security is a really valuable benefit that you have earned by paying into it during your working career. This is a real asset that people need to think about before making a decision." -Bill Schretter, certified financial planner at Raymond James Financial

The lower-earning spouse, meanwhile, can start claiming spousal benefits. At age 70, the higher-earning person starts taking benefits and the lower earner can continue taking the spousal benefit or the benefit amount based on his or her own earnings.

Confused yet? You're not alone. Strategies for maximizing Social Security benefits can get complicated, which is why it can be beneficial to consult a pro.

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But it's important to remember that you are entitled to receive payments, because you have been paying into the system every year you've been working and paying taxes.

"Social Security is a really valuable benefit that you have earned by paying into it during your working career," said Schretter at Raymond James Financial. "This is a real asset that people need to think about before making a decision."

—By Sarah O'Brien, special to CNBC.com