Incorporating Social Security into your retirement planning

Social Security benefits are a key source of income for many Americans living in retirement. They provide a reliable amount of money every month that can increase with cost of living adjustments, and the benefits aren't directly affected by the ups and downs of the stock market. For these reasons, many people earmark Social Security benefits for essential expenses like housing or Medicare premiums.

Exactly how much you can get from Social Security depends on a range of factors and decisions you make, including your age, when you choose to start receiving money, how long you worked, and how you coordinate benefits with your spouse.

Due to the complexity and breadth of the Social Security system, it’s prudent to carefully consider your specific situation as you near retirement or become eligible to start claiming benefits for essential expenses like housing or Medicare premiums.

You can generally begin claiming Social Security benefits at age 62, but that may not be the best idea. Everyone has what's known as a full retirement age designated by the Social Security Administration (age 66 or 67, typically). If you start receiving benefits before that age, your monthly amount is reduced. The earlier you start retirement from your full retirement age, the bigger the reduction. On the other hand, if you choose to delay getting benefits past your full retirement age, your monthly amount goes up. Depending on your circumstances, your benefit may increase up to 8% each year you wait, but increases are capped at age 70, so there's no reason to delay any longer than that.

Let's see how that works for a person born after 1959 who is eligible to receive $2,000 per month at their full retirement age of 67. If they started taking benefits at age 62, they would only receive $1,333 per month (33% less), but if they wait until age 70, they’ll get $2,480 each month (24% more).

If that same person lives until age 94, their total lifetime benefits would vary significantly based on when they choose to start receiving them.

Obviously, these figures change depending on how long the person lives, and someone who dies at a significantly younger age might collect more in total if they choose to start receiving benefits at age 62. Everyone must make an individual decision about how to factor life expectancy into their thinking about when to start claiming Social Security benefits.

Suppose you choose to start receiving Social Security benefits before your full retirement age, while you're still working. In this case, your monthly payout may be reduced if your income from work exceeds certain limits detailed on the Social Security website. Keep this is mind if you’re considering retiring early and counting on Social Security payments along with income from a part-time job to make ends meet. You should also be aware that many people receiving Social Security benefits pay taxes on a portion of those benefits.

If you're married, you’ll want to coordinate your retirement plan with your spouse, especially your strategy for claiming Social Security. Maybe you can decide when you want to retire but your spouse can't , or perhaps your spouse's lifetime earnings are greater than yours. Whatever the circumstances, as a couple, you have several options for claiming benefits that can affect how much you collectively receive and when payments start.

If you're divorced and haven't remarried, you may also claim benefits based on the earnings record of your former spouse, whether they remarried or not. This won't affect your former spouse's benefits. There are some restrictions, but for many people, this strategy is advantageous.

If your spouse dies before you, you're generally able to collect their Social Security payments as a survivor benefit. You can't claim both your own benefit plus a survivor benefit, but you can choose the larger of the two amounts.