Americans who are approaching or in-retirement are faced with the vexing question of when to take Social Security benefits. For a married couple, this complexity is multiplied by consideration of spousal benefits and life expectancy issues. And those who've divorced — or, might be survived by another spouse — also have choices to make about supplementing their investment income after leaving the workforce. 

A Few of the Basics

So, let's go over how Social Security, or SS, actually works. "In broad terms, you can think of Social Security benefits as acting something like an old-fashioned pension that's indexed to inflation," said Kirk Ito, a financial planning analyst at Index Fund Advisors. In the case of SS, such payouts are tied to the U.S. Consumer Price Index (CPI). 

Most investors probably hear these referred to as cost-of-living adjustments, noted Ito. "How much these COLAs are going to be are announced by the Social Security Administration prior to the coming year," he said. 

If you've been paying into the system during your working life, typically you can start receiving full SS benefits between ages 66 and 67. (You can find the government's table for age requirements used to determine full payouts here.) "As it stands right now, you can also choose to receive Social Security payouts — at a reduced rate — beginning at age 62," said Ito. "But if you wait, up to age 70, you can get a notably higher monthly benefit." (See table here.) 

For a single person deciding when to take retirement benefits — and assuming he or she can afford to defer those payouts — the "important thing to understand is that Uncle Sam doesn't care when these are taken," Ito pointed out. The government's actuaries have calculated the benefits, he added. "So that means someone with an average life expectancy should collect the same present value of benefits regardless of when the benefits begin," said Ito. 

Given such a formula to determing benefits, a key question IFA's wealth advisors might be asked by their clients goes along the lines of: "How does the life expectancy of the claimant compare to the national average on a unisex basis?"

This unisex consideration can be especially important for women because they tend to live longer than men. "Depending on where a female client lands in terms of life expectancy tables," said Ito, "a higher Social Security benefit might prove to be a significant input to consider." On the other hand, he added, "a male in good health might place a higher value on deferring his SS payments." 

As a result, a case can be made for a male who is in excellent health and doesn't smoke or drink to excess — and thereby can be expected to live to age 90 or beyond — "might want to consider delaying benefits to age 70," said Ito. On the flip side, he added, "an overweight diabetic smoker might decide to begin taking benefits as soon as possible."

At the same time, Ito emphasized that "each individual health and financial situation is different, so these types of rule-of-thumb assessments might or might not pertain directly to your own unique set of circumstances." He likes to urge clients to start a discussion with an IFA wealth advisor before making any final decisions. "It's good to get an objective second set of eyes to review your overall situation and refine how and when you're going to start claiming SS benefits," said Ito. 

Actuarial Tables & Expected Return

Social Security payouts are determined by a complicated formula that is largely based on actuarial tables, according to Ito. For a male currently aged 65, for example, the tables used for SS purposes list life expectancy to be age 82. Conversely, a 65-year-old female's life expectancy per Social Security actuarial charts is slightly less than age 85. (For more information about life expectancies, which change by year, you can check the Social Security's site by clicking here.)

Ito has put together a list of important factors for IFA's clients to consider when determining the right time to file for Social Security benefits. Aside from earnings history and projected future earnings, these include:

1.) Maximum reasonable age at death. The higher this number, suggests Ito, the more likely it is that delaying benefits will prove to be the superior option.

2.) Expected earned rate-of-return on investments. This is used essentially as a discount rate — after deducting inflation — to determine the value of future benefit payments. "Generally, a higher expected rate-of-return from your investment portfolio means you would want to take any Social Security benefits sooner rather than later," said Ito. "In essence, you're choosing to keep more of your assets working in the market and using any Social Security benefits to supplement current income requirements."

3.) Expected rate of inflation. This is subtracted from the expected earned rate-of-return on investments to produce the real rate-of-return. A higher value makes it more likely that delaying benefits will be recommended by your IFA wealth advisor. "However, remember that Social Security does come with a built in cost of living adjustment," said Ito. 

Once we start considering the SS possibilities for a married couple, he noted, the complexity can quickly intensify. "Several independent authorities have written about how confusing it can be to combine both of a couple's Social Security benefit streams in a single, coherent claiming strategy," said Ito. 

Taking Advantage of Technology

A software platform that can prove helpful in sorting through such government benefits questions is "Maximize My Social Security." It's a software tool that IFA is authorized to use on behalf of its clients. "We use it internally to help our wealth advisors work with individuals and families in optimizing their claiming strategies," said Ito. 

The package was designed by Professor Laurence Kotlikoff, a long-time researcher and academic who has studied such issues. He's helped to develop an online tool to analyze each person's unique benefits claiming options. For most individual users, though, there is a cost attached to taking advantage of this sophisticated set of software tools.  

But given how complex coming up with an appropriate SS benefits strategy can be at any given time, IFA has purchased an advisor license to use this analytical program.

As part of our fiduciary menu of services, clients can work with an IFA wealth advisor for assistance in creating a detailed report to help choose an appropriate risk-adjusted plan-of-attack tailored to your circumstances and personal financial needs. We've got an in-house planning staff to help, too, as well as expertise in tax-related questions through IFA Taxes, a tax planning, accounting and tax return preparation division of Index Fund Advisors. 

You will need to supply your wealth advisor with a personalized SS report, which can be generated at the Social Security Administration's website. Also, if you're married, you'll need the one for your spouse as well. If you're interested in learning more about IFA or becoming one of our clients, please feel free to give us a call at 888-643-3133.

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This is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product or service. There are no guarantees investment strategies will be successful.  Investing involves risks, including possible loss of principal.  This is intended to be informational in nature and should not be construed as tax advice. IFA Taxes is a division of Index Fund Advisors, Inc.