When to Start Tapping Social Security

Unless you're exceptionally wealthy, your biggest financial risk in retirement is outliving your money. Experts agree the best defense is your Social Security benefit - a stream of inflation-adjusted, government-backed income that lasts as long as you do and continues for your spouse's lifetime after you die.

"No other financial vehicle can match that combination," says James Mahaney, vice president of Prudential Financial.

But 72% of retirees lock in a lifetime of smaller benefits because they start taking Social Security before their full retirement age.

That may be because they are afraid Congress will cut benefits that haven't been claimed yet, but that's unrealistic, says Michael Kitces, director of research at Pinnacle Advisory Group, a wealth management firm. "Social Security isn't broken - it just needs a little actuarial adjustment. I'm 34 years old and I see no reason to doubt it will be there for my generation."

For people who are much closer to retirement than Kitces, the whole decision about when to turn on that Social Security tap can be confusing and worry-provoking. Nobody wants to get it wrong.

Here are answers to the key Social Security questions that come up when workers are approaching retirement.

What are my benefits, and at what age?

To get your full benefit, or Primary Insurance Amount (PIA), you must delay application until your full retirement age. For people born between 1943 and 1954, that's 66. If you apply earlier, you get less. If you apply after 66, you get a bonus: Your benefits will rise by roughly 8% a year for up to four years of delay. Postponing your application doesn't just boost your initial benefit - it also dramatically increases your income in old age, because your annual cost-of-living increases are on a bigger amount, says Christine Fahlund, senior financial planner at T. Rowe Price.

Here is an example: Joe Smith is 61 years old and earns $70,000. If he takes Social Security at 62, he'll get $1,325 a month. If he applies at 66, he'll get $2,044 a month. If he takes it at 70, he'll get $3,192 a month.

But the whopping difference lies ahead: If Joe starts at 62, at age 85 his monthly benefit will be $2,426, estimates Fahlund. If he starts at 66, it will be $3,451. And if he starts at 70, it will be $4,830 - double the amount he would receive if he had filed at 62.

Fahlund ran Joe's numbers using fairly moderate inflation assumptions from the Social Security Administration that kept price increases below 3% for all of his retirement. To crunch your own numbers, use the Security Administration's Quick Calculator.

How do I claim my spouse's benefits?

If you're at least 62 and your spouse has started taking Social Security, you can apply for a spousal benefit. At 62, you qualify for 35% of your mate's PIA. Apply at 66, and you're eligible for 50% of his or her PIA. As a widow or widower, your maximum benefit is 100% of what your deceased spouse was entitled to.

(If you're divorced, don't despair. You can apply for spousal or survivor's benefits based on your former spouse's PIA - even if he or she hasn't started Social Security - if you're at least 62, your marriage lasted at least 10 years and you haven't remarried.)

You can never collect your own benefit and your spousal (or survivor's) benefit simultaneously; the most you can receive at one time is an amount equal to the larger of the two.

How can we maximize our benefits as a couple?

If you delay your Social Security application until you're 66, you can opt to collect your spousal benefit first, and later switch to your own bigger benefit. That allows you to use this two-step strategy for two-income couples: Mary, who earns less than John, files for Social Security at 62. At 66, John files for 50% of Mary's PIA, postponing his own bigger benefit until he's 70. The four-year delay boosts his benefit by 32% (plus annual inflation adjustments.)

Regardless of which spouse dies first, notes Mahaney, the survivor receives the delayed larger benefit for life.

A different two-step strategy works for one-income couples. Say Liza's the breadwinner. Fred is 62 but has no benefit of his own. When Liza is 66, she can file for her benefit to green-light his application for a spousal benefit, and then immediately suspend her application. ('File and suspend' is an option only after you turn 66.) The result: Fred gets a spousal benefit, and Liza earns extra credits by waiting until she's 70 to reactivate her application.

Is it worth delaying my benefits?

If you delay collecting Social Security, you miss years of smaller monthly checks. Typically, a late applicant must live to at least 78 to come out ahead. The Society of Actuaries says a 65-year-old couple now faces a 50% chance that at least one of them will live to 92, and a 25% chance one of them will make it to 97. If you're the primary breadwinner, says Mahaney, delaying Social Security "is a wonderful way to protect your spouse from running out of money."

Can I collect Social Security while I continue working?

If you start your benefits early but keep working, you will be penalized. Until the year you turn 66, the agency withholds $1 of benefit for each $2 you earn above $14,640. In the year you turn 66, it withholds $1 from each $3 you earn above $38,880 until your birthday month. At 66, the annual earnings cap disappears and your benefit is recalculated to make up for the withheld checks.

For example, if 12 monthly benefit checks were withheld due to excess earnings, your recalculated benefit will be the same as if you had applied for Social Security at 63 instead of at 62; if six months of benefits were withheld, your ultimate benefit will be the same as if you'd applied at 62.

Should I defer benefits even if I'm already retired?

Yes, says Kitces. "All of us who have crunched the numbers have found you come out better when you delay Social Security even if you must pay expenses from other accounts to do it."

That may require a lot of discipline now, but when you're 95 or so, you'll probably be glad you did.