FA Playbook

Get the timing right on Social Security claims

Ilana Polyak, special to CNBC.com

Social Security may be criticized for being an insufficient retirement benefit, and some may question its solvency, but there's no denying that it plays a starring role in many people's retirement plans. 

The program makes up more than half of the retirement income of people who are over 80 years old, on average, according to AARP.

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"For a typical individual, the amount of money they can get with some strategies can be as much as $100,000 [or] more over a lifetime, and for married couples it can be as much as $250,000," said Chris Jones, chief investment officer of Financial Engines, which sells software that analyzes every claiming option a person can encounter. 

"When you think about that relative to what people have in retirement savings, that's a big deal," Jones added. 

So it pays to figure out the claiming strategy that maximizes your monthly check. 

Timing is everything

The cornerstone of any Social Security strategy is figuring when to claim. There are three key numbers to keep in mind: 62, 66 and 70. 

You are first eligible to collect Social Security at 62, but your benefit is reduced for every month you take the benefit before reaching full retirement age.

At 62 it is 25 percent less than it would be at full retirement age. Carol Thomas, who worked for the Social Security Administration for 27 years and now answers Social Security–related questions for website RetirementCommunity.com, said that that works out to a reduction of about $15 each month.

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The full retirement age is 66 for people born between 1943 and 1954 (it starts to creep up in monthly increments for those born after 1955). But if you wait until age 70, you earn delayed credits of about 6 percent to 8 percent a year on top of cost-of-living adjustments. At 70 your benefit would be 66 percent higher than it would be at 62.

Still, 62 continues to be the most popular claiming age, though it is on the decline, according to analysis by the Urban Institute.

Social Security loophole

"The huge majority of people don't pay much attention to the question [of when to claim], even though there are thousands of dollars at stake," said Russell Settle, a partner with SocialSecurityChoices.com, a software firm that runs different claiming scenarios for people nearing retirement. 

Jones of Financial Engines noted that waiting doesn't have to be an all-or-nothing matter.

"If you don't have enough money to defer to age 70, you can increase your income by 15 percent if you defer two years," he said. "Even deferring a couple of months can make a big difference."

Thousands of strategies

By some estimates, married couples have about 8,000 claiming options between them.

"Social Security is complicated, because life is complicated," said certified financial planner Gail Buckner, a national financial planning spokesperson with Franklin Templeton Investments. Married people must figure out not only when they'll file for their own benefit but also how to coordinate it with a spouse.

"To take advantage of the claiming strategies that bring in the big bucks, at least one [of the spouses] needs to wait," said Settle at SocialSecurityChoices.com.

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File and suspend has become a popular approach, particularly for couples with an age and wage disparity, Settle explained.

Let's say a husband, 66, and a wife, 62, take this route. At 66 the husband's full benefit is $1,000. By filing and suspending, the wife can claim her spousal benefit, which is half of the husband's benefit: $500. The husband's benefit can continue to grow until age 70. When the wife reaches 66, she can decide whether it would be better to take her own worker benefit or continue with spousal benefits.

For couples with comparable incomes, Settle recommends filing for "restricted application," a less familiar strategy. Using the same example as above, the tables are now turned. The wife can file for an early benefit of $750 at 62 (reduced by 25 percent for filing early). That allows her husband, who has reached full retirement age, to collect the spousal benefit of $500. One condition is that the husband should not yet have filed for his own worker benefit. 

Social Security is complicated, because life is complicated.
Gail Buckner
national financial planning spokesperson with Franklin Templeton Investments

At age 70 the husband can file for his much higher worker benefit. The wife can choose to keep her reduced benefit or file for a spousal benefit if it's higher.

"The problem with delaying, of course, is that you don't have money coming in," Settle said. "But these strategies get you money in the near future."

Strategies for singles

Singles may not have to coordinate with another person and don't have the option of getting spousal benefits, but they still need to think carefully about when to start benefits. Delaying will almost surely yield more lifetime income if you have longevity on your side and enough other assets to bridge the gap to the older age.

But if you find yourself tapping Social Security early, you have 12 months to rethink the decision. If you stop your benefits and repay the money, you can "start with a whole clean slate," said Franklin's Buckner.

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Even if you miss that deadline, there's another chance to hit the pause button. At reaching full retirement age, you can ask for your Social Security benefit to stop. That will allow you to earn delayed credits from 66 to 70, albeit on a small base because you collected early, Buckner said. 

"There is flexibility in how you manage your benefits," she added.

—By Ilana Polyak, special to CNBC.com