Strategies to Max Out Social Security Benefits

Much of my mail these days seems to start with the same warm greeting: "What planet are you from?" That's invariably the case when I suggest that readers consider ways to maximize Social Security benefits instead of grabbing a check at age 62, as about half of all retirees do.

I know: Waiting to claim Social Security until your mid-60s or later isn't easy. Many people need the cash, are fearful that the program might change (or collapse), or are trying to avoid tapping their savings for as long as possible. But two trends make this a good time to look at "claiming strategies" for Social Security and help illustrate just how much money is involved.

First, a recent report from the Census Bureau highlights a startling fact: The 90-plus population is projected to quadruple in size between now and 2050 -- meaning that living into your tenth decade is something to factor into Social Security planning. Second, a growing number of Web-based tools now allow you to run dozens of possible claiming strategies -- and can recommend how to maximize benefits.

For the examples below, I asked the folks at SocialSecuritySolutions.com in Leawood, Kan., for help; I like that the company's lead researcher, Baylor University finance professor William Reichenstein, has written extensively about how best to tap nest eggs. (Using the site's tool runs between $20 and $125, depending on how much personal attention you want interpreting your report.) Given the stakes, I suggest comparing results from a few different sites. You'll find free tools at the Social Security Administration's site, AARP.com and AnalyzeNow.com; another site, MaximizeMySocialSecurity.com, charges $40.

Now some numbers. First, we need a way of measuring why one claiming strategy might be better than another. I'm going to use cumulative lifetime benefits as a yardstick. In other words, I want to see, given a specific starting age and life expectancy, which claiming strategy will pay me and a spouse the most money over a lifetime (or, considering there are two of us, lifetimes). You also could look at monthly income, but it can be misleading. More on that in a moment.

We'll start with a simple example. Joe and John can begin collecting $1,500 monthly from Social Security at age 62, or $2,640 a month at age 70. Let's say both live to 92. If Joe claims benefits at 62, his lifetime total will be $540,000. If John waits until 70, he'll net $696,960 -- almost $157,000 more.

If you look solely at monthly income, claiming benefits at 62 looks smart; Joe is getting $1,500 a month for eight years, and John is getting zilch. But again, "longevity risk should be part of your planning," says William Meyer, founder and managing principal of Social Security Solutions. What are the odds that you will live to 85 or 90 -- or longer? The answer for many: increasingly good.

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Now let's look at a husband and wife: Bob and Carol, ages 62 and 58. Bob is scheduled to receive $2,000 at his full retirement age of 66, while Carol is scheduled to receive $1,600 at her full retirement age, also 66. Each, of course, can claim Social Security at age 62. If they do so -- and Bob lives until 83 and Carol lives until 90 -- their cumulative benefits will be $840,600.

But Social Security Solutions offers a more lucrative -- and slightly more complex -- strategy. At his full retirement age, Bob claims a spousal benefit of $800. (Yes, Social Security allows this.) Carol, meanwhile, claims a benefit (based on her earnings) of $1,200 at age 62. Finally, Bob, at age 70, switches to a monthly benefit of $2,640, based on his earnings history, a move that falls under "delayed retirement credits." In this case, the couple's lifetime benefits will total $1,043,520, a gain of almost $203,000 over the let's-jump-in-the-pool-as-quickly-as-possible approach.

The other interesting piece of these two strategies: survivor benefits. If both spouses claim benefits at age 62, Carol -- when Bob dies -- will be eligible for a survivor's benefit (under Social Security's rules) of $1,650 a month. But under the second claiming strategy, she would get a survivor's benefit of $2,640, an extra $1,000 each month.

Now, consider the options for a woman, age 60, who loses her husband. Her benefit at full retirement age is $1,400; his would have been $2,000. She could begin collecting a widow's benefit of $1,430 at age 60. But it might be better for her to pursue a different strategy -- claiming a reduced benefit, based on her earnings history, of $1,050 at age 62 and switching to a widow's benefit of $2,000 at age 66. The difference in total benefits if she lives until age 89: an extra $112,000.

Yes, the numbers can get a little head-spinning. But I hope these examples give you an idea about how much money might be forfeited if you claim benefits early -- and how many claiming options are available. I recently heard this from Mark Ellingson, a retiree in Lake George, Colo.: "Take benefits [at age 62] while you still have good health and can enjoy life." That's tough to argue with. But please, do consider the alternatives.