Want a fat nest egg? Make the right Social Security choices

It's your last, best chance to fatten your nest egg. But all too often, new retirees undermine their own financial security by claiming Social Security too early, and without regard to strategy.

Indeed, the amount you receive in monthly benefits is largely determined by the age at which you begin collecting, your marital status, lifetime earnings and the method by which you claim.


Social Security
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If you're not yet familiar with the strategies available for claiming Social Security, you should know there are many—more than 8,000 for married couples alone. And the stakes for selecting the right one are undeniably high.

Financial Engines, a defined-contribution managed-account provider, estimates the average single retiree leaves more than $100,000 in lifetime benefits on the table by fumbling his or her Social Security choices. The average married couple, it reports, misses out on $250,000 or more.

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"Social Security is about as complicated a fiscal system as is humanly possible to design," said Larry Kotlikoff, an economics professor at Boston University and author of the book "Get What's Yours: The Secrets to Maxing Out Your Social Security," set for release in February. "This is most Americans' largest financial asset, and so many people don't optimize it."

To get it right, most retirees require the help of an expert—or at least an arsenal of online tools.

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AARP, for example, offers a calculator that reveals how different claiming strategies might impact your benefit.

Investment firms, such as T. Rowe Price, also offer free benefits evaluators, while tools from pay-for-play software vendors—including SocialSecuritySolutions.com, priced from $20 to $250 and Kotlikoff's MaximizeMySocialSecurity.com ($40)—come at a cost but provide a more comprehensive analysis.

Determining how and when to begin claiming Social Security starts with an assessment of whether or not you can afford to delay benefits until your full retirement age, said Alison Shelton, senior strategic policy advisor with AARP.

Current retirees can collect as early as age 62, but their benefit will be permanently reduced by a percentage based on the number of months before they reach full retirement age, which ranges from age 65 to 67, depending upon birth year.

Claim early, get less

Those with a full retirement age of 66, for example, would receive a 25 percent reduction in benefits if they start receiving benefits at age 62. If they wait until age 63, they lose 20 percent, and age 64 roughly 13 percent.

Likewise, if you start receiving spousal benefits at your full retirement age, you will collect 50 percent (the maximum) of the monthly benefit your spouse will receive if his or her benefits started at full retirement age. If you start receiving benefits at age 62, however, you would get 35 percent of that benefit, and at age 65 you would get 45.8 percent.

Despite the permanent reduction, however, many retirees start benefits at the earliest opportunity, either because they don't understand their options or to make ends meet.

In 2013, the most recent year for which data are available, the government reports roughly 37 percent of men and 42 percent of women claimed Social Security at age 62.

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In some cases, it may also make sense to file early if your health is compromised or you have reason to believe (e.g., due to family history) that you won't reach the average life expectancy for your gender and age bracket.

"It's based on average life expectancy, so if everyone in your family lived to age 99, you're getting a good deal, but if you have a terminal diagnosis, absolutely go ahead and claim," said Shelton.

It's worth noting, too, that you can still collect Social Security retirement benefits if you are working, but if you are younger than full retirement age and make above the yearly earnings limit of $15,480 for 2014, your benefit payment will be reduced by $1 for every $2 you earn above that amount. After you reach full retirement age, your benefit is no longer reduced.

Those with the greatest opportunity to boost their retirement income, said Shelton, include retirees who are financially secure enough to postpone benefits, allowing them to accrue delayed retirement credits.


Postpone and prosper

For each year you postpone claiming Social Security, your income increases by 8 percent until you reach age 70.

The same retiree who collects $1,000 by waiting until their full retirement age at age 66 will collect $1,320 by delaying until age 70. That's a 32 percent increase.

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Retirees can also maximize their Social Security income through creative claiming strategies. (President Obama's 2015 budget proposal, however, took aim at strategies used by upper-income claimants to bolster their benefits.)

One of the most popular strategies for married couples, for example, is the "file and suspend" method, which is particularly useful where one spouse has significantly higher lifetime earnings, said Shelton.

Here's how it works: The higher-earning (first) spouse files for benefits at full retirement age, enabling the other to file for spousal benefits as early as age 62—which, again, amounts to half of what the first spouse is entitled to.

The first spouse, however, doesn't collect benefits. Instead, they are immediately suspended so that the benefits grow 8 percent a year until age 70.

AARP notes that this strategy is a great way to maximize combined income, as well as survivor benefits. If the higher earner dies first, the lower earner will be able to collect 100 percent of the higher earner's benefit.

There is also the "claim now, claim more later" approach, which can also result in bigger lifetime benefits, even if it doesn't always increase monthly benefits.

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This strategy is useful for dual-income couples in which each spouse qualifies for his or her own retired worker benefit, but one spouse must be at least full retirement age, AARP reports.

Using the "claim now, claim more later" strategy, retirees can claim some benefits now, and higher benefits later, by applying for spousal benefits instead of their own retired-worker benefits when they reach full retirement age. Later, according to AARP, you can claim your own higher retirement benefits, which have been growing 8 percent a year up to age 70.

Technically, working couples who are close in age and who each qualify for Social Security benefits on their own work records can deploy both the "file and suspend" and "claim now, claim more later" strategies at the same time. But both must be at least full retirement age.

As AARP explains, the older spouse claims retirement benefits at full retirement age and immediately suspends them. When the younger spouse turns full retirement age, he or she files for a spouse benefit only.

"Most people get extremely bad advice by asking neighbors or calling the Social Security Administration." -Larry Kotlikoff, author and economics professor at Boston University

Then, when the older spouse turns 70, he or she can claim the retired-worker benefit, which has been growing by 8 percent per year. And when the younger spouse turns 70, he or she can convert the spousal benefit to his or her own retired-worker benefit, which also has been growing by 8 percent a year.

Social Security experts, online calculators and software products can help identify the claiming strategies that would yield the biggest benefit for you, factoring in life expectancy, tax brackets and marital status.

As pensions disappear and life expectancies rise, said Kotlikoff, retirees can ill afford to let guaranteed income pass them by.

"Most people get extremely bad advice by asking neighbors or calling the Social Security Administration," he said. "Or they try to make this decision on their own.

"With 10,000 baby boomers retiring every day, if even 1,000 of them get it wrong, that would be terrible," Kotlikoff added.