Two Ways To Optimize Social Security Benefits

May 05, 2008

Tools exist now on the Internet to easily see when the optimal time is to start taking your Social Security payments to maximize income.

Deciding on when to take Social Security benefits is a question everyone wonders about, whether they're investing in portfolios using index mutual funds or exchange-traded funds.

But did you know there are two other options to consider when creating the right mix of Social Security and investment income to live on?

We all know that Social Security payments are based on age. As such, taking SS earlier than full retirement age decreases benefits, while waiting beyond full retirement age increases benefits. But your options don't end there.

When To Start Social Security

To begin, let's review full retirement age. Full retirement age is dependent on your date of birth. For instance, if you were born in 1937 or before, your full retirement age is 65. If you were born after 1937, your full retirement age is extended on a sliding scale. For those born between 1943 and 1954, your full retirement age is 66.

You can begin taking benefits as early as 62, but your payments will be reduced by about 25%-30%. A spousal benefit will be reduced by about 30%-35%. (You can find useful Web resources that show retirement ages, plus benefit reductions for applying early, and increases for delaying your application. Try this link).

To calculate your personal optimal age for starting benefits, the IRS has provided "break-even points." These essentially tell you how long it will take to break even in total benefits received if you begin early, as opposed to waiting until full retirement age or full benefit age of 70. (Look here for more information).

Turning Back The Clock

Notice on the break-even page that it says "permanently reduced rate." Well, that isn't exactly true because you can wiggle out of your permanently reduced rate.

There is a little-known Social Security option that allows SS recipients to withdraw their application. In doing so, the applicant pays back all benefits received with no interest or penalty. Furthermore, the applicant is entitled to a tax refund or credit on any taxes paid on the received benefits.

Withdrawing your application is as if you had not applied yet. That means you can apply for Social Security again at a new higher rate. Doing this results in obtaining the same benefit as someone who waited until a later age to take Social Security. The increased benefit can be substantial and is in effect like buying a lifetime annuity at a cost about 35% less than a comparable annuity from the lowest-cost providers.

Who would want to do this? It's mostly done by people who continue to work, but it can also be a way to lock in lifetime higher guaranteed income.

Team Play

One other Social Security option even less well known is for one spouse to begin taking social security at an early age while the other spouse holds off until full retirement age.

As an example, Janice begins taking Social Security at 62 or 63, while Ned delays his application until 66 (full retirement age). Then Ned files for a spousal benefit. Ned will get more than half of Jan's benefit because the IRS will calculate the benefit based on Jan's full retirement age even though she is younger. Our example assumes Jan and Ned are the same age.

Ned continues to receive the spousal benefit for four years until he's 70, then he applies for his own Social Security based on his work earnings history. He will then receive the maximum payout. His Social Security benefit will be about 33% higher than if he had taken Social Security at 66.

Using this strategy allows Ned to receive some benefits starting at 66 and still get his increased benefit at age 70 as if he had waited. The break-even point for this strategy is 79, meaning the strategy provides higher total benefits after nine years than Ned and Jan would have received if both applied for full benefits at 66. (Check the information at this site).

When deciding whether you should use these options, you need to look at your own personal circumstances. (See here for a few ideas to think about).

Customizing your Social Security benefits in conjunction with other options can help you achieve a more secure retirement.


Paul Keck is a retired engineer and an investor advocate for retirees. His column on investing is a regular feature of

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