How to maximize your Social Security payouts

(MoneyWatch) One of the smartest things you can do to prepare for your retirement is to make your Social Security income as large as possible by delaying benefits for as long as you can (but no later than age 70). Seems simple, right? But according to the Social Security Administration, about half of all Americans start Social Security at age 62, the earliest possible age with the lowest income, and nearly three-quarters of Americans start before their full retirement age (FRA).

Let me show you why it makes sense to postpone starting your Social Security benefits. We'll take a look at people born in 1950 This year, those folks will turn 62 and become eligible for Social Security benefits. The following table shows estimates of the total lifetime Social Security income for a single person earning $75,000 per year in 2012 for three different starting ages: age 62, your full retirement age and age 70.

The first row shows projections of the initial annual Social Security income for the three different starting ages. I estimated these by using the Quick Calculator on the Social Security website. In this example, if you start Social Security benefits at age 62, your annual income would be $17,700. Your income increases to $23,940 if you wait until age 66, the FRA for people born in 1950. And if you wait until age 70, the oldest age at which you can start benefits, your annual income increases to $32,100.

The second row shows the total income you'd earn from Social Security over your lifetime if you live just to age 70 and then die. In this case, starting Social Security at age 62 is the best strategy, since the total lifetime income -- $141,600 -- is the highest. If you wait until age 70 to start Social Security income but then die at the same age -- well, that's a bad move, because then you get nothing.

The third row shows the total lifetime income if you live to age 80 and then die. In this case, starting Social Security at your FRA is the best strategy, because it provides the highest total lifetime income: $335,160.

The fourth row shows the total lifetime income if you live until age 90 and then die. In this case, starting Social Security at age 70 is the best strategy, since your lifetime income is highest at $642,000.

Note that these estimates are in current dollars -- the totals haven't been adjusted for the time value of money or to reflect future cost-of-living adjustments. Adding these refinements in the calculations only complicates matters but doesn't change the main conclusions.

The ideas in this post apply to single people; the considerations get more complicated for a married couple. However, it's usually the case that the best strategy is to have the highest wage earner -- often the husband -- delay taking Social Security benefits for as long as possible.

This table shows why it's good to have an estimate of your life expectancy. My earlier post, How long do you have to live, showed that the average age at death for Americans currently in their 50s and 60s is their mid-80s. This suggests that delaying Social Security benefits until FRA or beyond is the best strategy.

And keep in mind, these are just average life expectancies across the entire population. If you have above average education, above average income and you don't smoke, chances are good you'll live beyond the average life expectancy for the population at large. Your life expectancy also depends on your particular family history and the lifestyle choices you make. You can estimate your life expectancy taking these factors into account at the websites www.livingto100.com or www.bluezones.com.

Here are answers to a couple common questions -- and misconceptions -- about when to take your benefits:

Wait to take Social Security? No way! Take it as early as possible. After all, you never know when you'll die.

I can't tell you how many times I've heard that mistaken reaction to the ideas in this post. Yes, you don't know for sure when you'll die, but it's more likely you'll live close to your life expectancy or beyond, and the odds are pretty small that you'll die in the next few years.

I don't need the Social Security income, but I'll start it early anyway and invest the money.

Another bad idea for most people. To win this bet, you'll need to die early, or take a lot of risk in the stock market.

One of the best ways to determine when to start your Social Security benefits is with online software that analyzes the decisions that will give you the largest lifetime payout. Examples include www.socialsecuritytiming.com and www.socialsecuritysolutions.com.

Boost your Social Security payout by $100,000
Social Security strategies: How to get $90,000 more for your spouse
Start Social Security early and invest? Ask the actuary

It may take a few hours to analyze the information and determine the best age for you to start collecting Social Security, but it can increase your lifetime payout by thousands of dollars. In effect, you'll be paying yourself hundreds or thousands of dollars per hour for the time you spend doing your homework now. That's a pretty good return on your investment!

Image courtesy of iStockphoto contributor Kameon007.

[kraig_richard]

"Get it while you can" ...... J. Joplin

[woodrow2012]

Yeah, their are pros and cons concerning retiring early at 62 or waiting until your Full Retirement Age (FRA). My FRA is 66. After much decision, I compromised on this, and retired at 64.

[dp978]

The one thing I would comment on (noting that I do agree its best to wait as long as possible) is that the initial money you recieve between 62-70 can be reinvested and although you may not make up the entire difference in the long run it does allow for a small closing of the gap.

Putting 17K per year into a safe portfolio may net you some return, but that assumes you don't need the 17K immediately, which may defeat the purpose of taking early SS. I only put this out there as another point, not to debunk the authors comments.

-Derek

[skeezix06]

My dad died after only 1 year of retirement. But setting that aside. The cost of living (which will not be constant) at the time of retirement 62 versus retirement at 66 or 70 (if a person lives that long) will have what effect on the social security you actually get?

In other words, factoring in the cost of living, do you actually get more in real dollars/spending power if you wait to retire at 66 or 70? Might it not be better to retire at 62 and enjoy being not be quite as destitute for a few years?

[DaveInRacine]

The math is way too simple. You can't just take the initial annual income and add it up for the years received because the dollars you get at 62 are more valuable than the ones you'll get at 66 and 70. You need to do a net present value calculation of the 3 income streams in excel to account for inflation and the impact of missing the first 4 or 8 years of revenue. Each income stream starts at age 62 (zero income for 4 years and then start at 66, zero income for 8 years and start at 70) and goes as long as you think you'll live. Do this for a few different lengths of time and see what you get.
Also, " it's more likely you'll live close to your life expectancy or beyond" doesn't make sense as the life expectency of a 62 year old is the average expected length of life left which means that roughly half will die before that and half will die after that. So your odds are just as likely that you'll die before as they are that you will die after that date.
And for starting early and investing - "To win this bet, you'll need to die early" is just the opposite. If you die early you will not have had the chance to spend the money. You win if you live longer, the investment grows, and you spend the larger amount.

[Achimaatz]

You're on the right track, DaveInRacine, the article completely ignores the time value of money. The future value of monthly payments invested over 48 months (the time from 62 to 66 years of age) at a given percentage adds up very quickly. It is actually best to get SS at 62. Waiting 4 more years just doesn't make sense when TVM is applied; remember it's compounded NOT simple interest. Besides, SS will probably disappear soon, get it while you can. Ref. Tschultz1955 - he understands.
It is in the Fed's best interest for us to postpone collecting SS as long as possible.

[retiree44]

I notice that they conveniently left off how the Windfall elimination Program/ Government Pension offset affects your Social Security check as the amounts will then vary greatly and you will find that you will not get more money in the long run.

Retiree

[ralphcramden50]

I am 62 yrs old, my wife is 65 yrs old and will collect SS on my work record. If I retire at age 63 and begin taking SS benefits it will, by my calculation take 20+ years before B/E with FRA benefits. Because my wife cannot begin collecting until I am collecting benefits we are losing $$ every month. I think this is different than delaying to get a higher benefit later. She cannot receive more than 50% of my FRA so waiting will only result in small increases in her checks. Am I not considering all the variables?

[Tschultz1955]

Bottom line is that it takes over 10 years to recover the money you would have allready had if you wait until 66

[woodrow2012]

That's very true. Also,I think it's better to get that retirement money now at a younger age so you can have fun spending it. Getting more later is tempting, but you will be older and the extra money may not mean that much then. With each coming year, you start slowing down and old age starts creeping in.......

[credibility2]

If I could have found a full-time job or even a good part-time paying job, I would have never opted to take my reduced Social Security at 62. With my savings dwindling, I didn't have enough to cushion any differential between the payouts at age 62 until age 66, even with a prospect of a part-time job. Once the payouts began, I continued making efforts to secure a job during the first year of reduced SS so I could repay my payouts and have them redeposited; SS only gives you a one year window to do this and stop any further payouts. I'm still trying to find work, since I can earn up to $14k without SS reducing any of the monthly payouts. It was a difficult decision, albeit a necessary one in order to survive.