Make the Most of Social Security

Deciding when to begin collecting Social Security benefits could be one of the most important retirement-income decisions you'll make. Although it can be complicated, some excellent tools are available to help you figure out your optimum claiming strategy.

AARP offers a free Social Security benefits calculator that gives you a good idea of how large a benefit you can expect, based on when you claim it. It works for both married couples and singles, including those who are widowed or divorced. But if you want a more precise picture of the impact on your monthly and lifetime income—and are willing to pay a modest amount for recommendations that could lead to thousands of dollars of extra income each year -- go to SocialSecuritySolutions.com. Use promotion code KIP for a 10% discount on personalized reports that range from $20 to $125 (the top-tier package includes live consultations with a Social Security claims expert). In most cases, it makes sense to wait until your normal retirement age -- currently 66 for anyone born from 1943 through 1954 -- to collect benefits. At that point, two things happen: You are no longer subject to the earnings cap (meaning you can continue to work without jeopardizing any of your Social Security income), and you can get creative with your collection strategy to maximize your benefits. In 2012, you lose $1 in benefits for every $2 you earn over $14,640 if you claim benefits before age 66 and continue to work.

Strategies for couples. Couples should try to maximize household income over their lifetime. To do that, sometimes it makes sense for the lower-earning spouse (usually the wife) to collect benefits early, at age 62, and the higher-earning spouse to delay claiming benefits for as long as possible, earning an 8% delayed-retirement credit for each year up to age 70.

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Although the wife's retirement benefits will be permanently reduced by 25%, collecting benefits early will have no impact on her more valuable survivor benefit. If her husband dies first -- and she is at least normal retirement age at the time -- she will be entitled to 100% of the monthly amount he received during his lifetime.

In some cases, a spouse who has little or no work history (again, often the wife) may be eager to collect spousal benefits -- worth up to half of what the main breadwinner receives. The husband can exercise a strategy known as file and suspend. That means he can file for his benefits at 66, entitling his wife to receive spousal benefits immediately; then he can suspend his own benefits until age 70. A different strategy may work better for dual-career couples with similar lifetime earnings. As long as one spouse is receiving benefits and the other spouse waits until normal retirement age to claim benefits, the second spouse can restrict his claim to spousal benefits only. That means he can collect half of his wife's benefits now and delay receiving his own benefits until age 70.

Collect on your ex. Normally, to be eligible to collect on your former spouse, you must have been married for at least ten years and you may not be currently married. You can collect benefits as early as age 62 (but earnings limits apply) as long as your ex is old enough to be eligible for benefits -- even if he or she has not yet collected them. It doesn't matter if your ex has remarried. But if you are divorced and wait until age 66, you can restrict your claim to spousal benefits only, allowing benefits based on your own earnings record to accrue delayed-retirement credits. Then you can switch to your own benefit, assuming it's larger, at age 70.