Preparing for Social Security: a 7-point checklist

Couple prepares for Social SecurityDo you remember your first paycheck? If you looked closely at the stub, you may have observed -- perhaps grudgingly -- that the government had withheld some of your pay for something called Social Security.

It probably seemed it would be an eternity before you'd see that money again.

But now here you are, wondering whether it's finally time to claim your Social Security retirement benefits. Choosing when to begin drawing Social Security can be a complex decision, as there are many variables that can impact the amount of money you receive over your retirement. An ill-considered move could cost you thousands.

While it's challenging to select the right time to start collecting, it can be all too easy to choose the wrong time. If you answer "no" to any of the questions on the following checklist before applying for your benefits, you may be doing just that.

1. Have you reached your full retirement age?

Woman looks into Social SecuritySixty-five is the age many Americans associate with retirement. But for Social Security's purposes, full retirement age varies with the year you were born. People born in 1937 or before are considered at full retirement age at 65, but those born in 1938 have to reach 65 years and two months. Those born later have to wait even longer to reach their full retirement age. Workers born in 1960 or later, for instance, will have to wait until age 67 to reach full retirement age.

Regardless of when you were born, you can begin collecting some Social Security benefits as early as age 62. But your monthly benefits will be permanently reduced if you begin drawing before your full retirement age.

While there are circumstances in which it makes sense to take benefits before full retirement age -- failing health, for instance -- drawing benefits before then will reduce the amount of your monthly check, which can lead to significantly reduced benefits over the course of your retirement.

2. Have you compared your expected benefits and expenses?

Couple compares expenses and incomeThe Social Security Administration (SSA) website has calculators that can estimate your expected benefits. Once you've calculated what you can expect each month from Social Security, add in what you expect from investments, pensions and other sources of retirement income.

Now determine what expenses you'll have in retirement. While you may enjoy some savings compared to your working years -- you may drive or eat out less, for instance -- you may pay more for other things. For example, if you're leaving an employer-funded health plan and enrolling in Medicare, you should research whether you'll need to pay premiums for the coverage you desire. Medicare Part B, the medical insurance component of Medicare, requires a monthly premium of $104.90 in 2013.

Compare your expected income and expenses. If your income is less than your expenses and the option to draw from savings each month isn't attractive or possible, it may be wise to postpone filing to take advantage of Social Security's delayed retirement credits. These credits can increase your monthly benefit by up to 8 percent for each year you wait to draw between full retirement age and age 70.

3. Have you coordinated with your spouse?

Couple coordinates on Social SecurityIt may seem sensible for married couples to enter retirement together and begin drawing Social Security at the same time. But there are ways couples can significantly increase their benefits if one or both of them is willing to work past full retirement age.

Some couples take advantage of Social Security spouse's benefits -- the assistance offered to the qualifying husbands and wives of Social Security beneficiaries -- by using a file-and-suspend strategy. This involves both spouses filing for Social Security benefits at full retirement age and then suspending their benefits. This allows one of them to claim monthly spouse's benefits as both of them continue to let their regular benefits grow through delayed retirement credits.

The beauty of the Social Security spouse's benefit is that it can serve as a cost-free addition to the regular benefits the couple plans to claim in the future. If both spouses are at full retirement age but at least one of them is not yet eager to claim benefits, a spouse's benefit may significantly increase the couple's overall take.

4. Have you thought about former spouses?

Woman stands apart from former husbandIf you're divorced, you shouldn't forget former spouses either. If your former marriage lasted at least 10 years and met other criteria, you may be eligible to claim your former spouse's level of benefits if it's higher than your own.

A noteworthy example of this involves three of the four former wives of Johnny Carson. Because the entertainer's first, third and fourth wives were each married to him for 10 years or more and none of them remarried, each was eligible to collect Carson's level of benefits when they reached retirement age.

This is sometimes called a derivative benefit, and claiming it doesn't affect your former spouse's benefits or the benefits his or her current spouse can claim (hence why all of Carson's qualifying former wives were eligible).

5. Have you considered your life expectancy?

Woman reviews test results with doctorThis is where Social Security planning can get especially tricky. If you wish to maximize the overall amount of Social Security benefits you receive, the best time to begin collecting depends on how long you will live.

For example, if you die at age 64, collecting benefits before your full retirement age is the obvious way to maximize your take (since you won't be alive at your full retirement age to collect anything). But if you take your benefits early and live until age 92, that's 30 years you'll be receiving a lower monthly benefit, which means you likely would have gotten more overall if you had waited until full retirement age to gain a larger monthly benefit. In fact, you may have fared best by waiting until age 70, since you would have claimed a substantially larger monthly benefit over 22 years in that scenario.

If your health standing is unclear, look to your family history for guidance. If your parents lived into their 90s or later, you may want to be especially careful about drawing benefits at a younger age.

6. Have you decided you're ready to stop working?

Older businessmanThough this question appears toward the bottom of the list, it may be one of the most critical. Even if you have reached full retirement age, compared your income and expenses, coordinated with your spouse and taken everything else into account, you may still wish to delay your benefits if your job improves your life in ways other than income.

Not everyone is ready to retire to a beach at 66. If you enjoy your work and show no signs of failing health, waiting past full retirement age for your Social Security benefits -- and collecting those delayed retirement credits along the way -- may be a wise strategy.

Even if you're on the fence about continuing work, keep in mind that your Social Security benefits will be waiting anytime you change your mind. But if you decide to retire and later find you miss your work, your career may not be as easy to rekindle.

7. Have you gotten your papers in order?

Woman looks through paperworkOnce you're certain that you've reached the right age to collect, it's time to get into details. The SSA website says you'll need the following documents to start the process:

  • Your Social Security card
  • Your birth certificate
  • Your proof of U.S. citizenship (if you were born outside of the U.S.)
  • A copy of your U.S. military service papers if you served between 1957 and 1968 (having served during these years can earn you extra credits that have to be manually added to your record)
  • A copy of your W2 and/or self-employment tax form for the previous year

You can apply for Social Security benefits online at ssa.gov, over the phone at 1-800-772-1213 or at your local SSA office. You can find the location of your nearest office on the SSA website.

Claiming what's yours

Couple relaxes togetherAs the years passed after your first paycheck, you probably learned to ignore the small chunk of income Social Security claimed from you each pay period. But the money you contributed all those years shouldn't be forgotten or discounted. Giving proper attention to your Social Security timing can ensure you get all you're entitled to.

Because the Social Security system is complicated -- there are 2,728 rules in the Social Security handbook alone -- and retirees' circumstances can vary, this checklist may not address everything you should consider before filing for Social Security. But it can give you a basic framework for approaching a decision that will impact the rest of your life.

| Money Rates Columnist

Your responses to ‘Preparing for Social Security: a 7-point checklist’

Showing 4 comments | Add your comment
Lee Bacon

9 January 2014 at 12:12 pm

Well, my husband and I thought we were well prepared for retirement to draw Social Security. When I went in to sign up to draw mine, I was told by the girl helping me if my husband died first to be sure and let them know because I could draw his and mine would drop. My husband died in Dec 2013 and when I alerted SS, they told me I would get $295/mo instead of drawing his which was $1234/mo. They said it's all because I worked for the gov't. I only get $1108.60/mo from working for the gov't. So, as I see it, I will get $1403.60/mo. My house payment is $1464.73. As I see it, I'll HAVE to sell my house and whatever else I have just to be able to eat or go live with one of my kids?

Nylaine Belcher

6 September 2013 at 3:48 pm

Having to pay $105.00 a month for Medicare when on a fixed income from soc sec. is so costly..That works out to approximately $1,260.00 a year for all the seniors..A way to help all of us reduce some of this expense, would be to give us a monthly choice to pay the Medicare bill. If you are going to be needing to see a medical professional then the expense would be necessary. If you are in good health, then you would not need to get the insurance, thus giving everyone some extra money for other things...Life after 65 should be the time for retirerees to have fun & enjoy the years left right? ...Peace to all!!

Phil Motley

6 September 2013 at 2:13 pm

As a former personal financial analyst, I have read many comments from other analysts and firms regarding social security that ignor a very important issue when counseling retirees to wait to draw social security. The total amount of social security one can draw from age 62 (early retirement) to say 66 (full retirement) can not be discounted in making an assessment of whether to draw early. In my specific case, drawing early as opposed to waiting until age 66 would have a break even point of somewhere around age 85. In other words, the amount I would draw between age 62 through 65 would take until age 77 to make up in extra benefits. And this is without considering the time value of money or inflation. One should carefully consider all options including quality of life and plans for expending resources through various stages of life before deciding to forego drawing social security early.

Steve Schioldager

6 September 2013 at 11:11 am

Never discussed in deferring after full retirement age is the opportunity cost of deferring, Although an 8% increase each year sounds good, it takes 12.5 years of the marginal gain to recover the money not received. not including any gains from that money that could have been invested. Thus if you defer for one year to 68 You will not see any real real increase until 80 At that time the marginal gain is small. The government has worked out the probability of death and the deferral benefits not the beneficiary.

Add your comment
(required)
(will not be published, required)