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How dependent are you on Social Security?

These quick facts from the Social Security Administration (SSA) make the point:

  • Nine out of ten individuals age 65 and older receive Social Security benefits.
  • Social Security benefits represent about 39 percent of the income of the elderly.
  • Among elderly Social Security beneficiaries, 53 percent of married couples and 74 percent of unmarried persons receive 50 percent or more of their income from Social Security.
  • Among elderly Social Security beneficiaries, 22 percent of married couples and about 47 percent of unmarried persons rely on Social Security for 90 percent or more of their income.

No matter how well you plan — and execute your plans — you could still end up being largely dependent on Social Security when retirement arrives. For this reason, it’s best to get an idea now what your income options will be — and you do have options.

Benefits are mostly based on when you retire

If you were born in 1960 or later your full retirement age is 67. That is the age at which you will get full benefits. But you can retire sooner than 67, or later if it will benefit you. According to the SSA, here’s how that will play out:

  • If you start receiving retirement benefits at age 62, you will get 70 percent of the monthly benefit because you will be getting benefits for an additional 60 months.
  • If you start receiving retirement benefits at age 65, you will get 86.7 percent of the monthly benefit because you will be getting benefits for an additional 24 months.

You can also increase your monthly benefit by delaying retirement past your full retirement age. You can increase your monthly benefit by 2/3 of 1 percent for each month you delay collecting benefits past your full retirement age, or 8 percent per year. If your full retirement age is 67, you can increase your monthly benefit by 24 percent if you delay collecting until age 70 (8 percent per year for three years).

No further increase in benefits is possible past age 70, so it will not make sense to delay any longer.

The Social Security “do-over” strategy

Since a lot of people don’t know about the higher benefits that come from delaying benefits until as late as age 70, SSA does offer a do-over strategy. The terms used to be more generous, but they've been tightened in recent years.

Under the latest regulations, retirees may withdraw their Social Security applications only once — and only within 12 months of first receiving benefits. And if you do, you have to repay any benefits you collected during that 12-month period.

As you might imagine, that repayment requirement keeps the number of people applying for the do-over strategy to a minimum — only a few hundred apply each year.

How does the do-over process work?

Let’s say your age of full retirement is 67, but you retire and begin collecting benefits at 62 — the earliest age at which you can collect. Your monthly benefit will be only 70 percent of your benefit had you waited to collect until turning 67. If your benefit would have been $2,000 per month at 67, it will be $1,400 ($2,000 X 70 percent) if you start collecting at 62.

Six months after you begin collecting benefits, you realize it was a mistake. You apply for the do-over strategy.

You can do this by voluntarily suspending your benefits until you turn 67. You will need to return any benefits paid to you, then delay reapplying until you turn 67. At that point, your benefit will be $2,000 per month — your full benefit.

If you decide to delay collecting until age 70, you can increase your benefit even more — by 24 percent (8 percent times three years) — increasing your monthly benefit from $2,000 to $2,480. That's an increase of $480 per month over your full retirement age benefit, and $1,040 higher than the benefit you began collecting at age 62.

Free online tools to optimize your Social Security benefits

There are free tools available to optimize your Social Security benefits. Five tools are listed, but despite the title of this section, #5 isn't free. However, it's an outstanding tool, which is why we're including it.

1. SSA's retirement estimator. The best place to start is with the Social Security Administration's Retirement Estimator This will enable you to see an approximation of your benefits at three ages: 62, your age of normal retirement, and at age 70.

2. Bankrate’s SS benefit calculator. Bankrate has many excellent calculators, for everything from mortgage loan amortization to retirement planning, so it follows that they’d also have their own Social Security benefit calculator: Bankrate's Social Security Calculator. Like all Bankrate calculators, this one also allows you to try an unlimited number of scenarios, so you can run estimates to your heart’s content.

The downside of this calculator, however, is it uses household income. I’m not entirely sure what the rationale for this is, given the SSA bases benefits on individual earnings, and never household earnings. Still, it is a valuable tool since it can also reflect your spouse’s Social Security income.

3. The T. Rowe Price Social Security benefits evaluator. Investment brokerage sites sometimes have Social Security tools, one of which is the T. Rowe Price Social Security Benefits Estimator. You can enter information about you and your spouse. You can then choose from among various Social Security goals, such as running different retirement ages, maximizing lifetime benefits, taking benefits as soon as possible, or maximizing income for a surviving spouse. The site also provides guidance on the best strategy to reach your goal.

4. The AARP SS retirement tool. As you might expect, AARP also has a Social Security retirement tool. The AARP Social Security Benefits Calculator uses the benefit estimate provided by the Social Security Administration's Retirement Estimator — that’s where you go to get the estimate you plug into the AARP platform.

The tool is pretty simple and offers you the opportunity to run different scenarios, as well as to work expenses into your calculations. AARP is an excellent resource for retirees and would-be retirees, offering a huge database of information and articles related to Social Security and all things retirement.

5. Intuit's SS optimizer feature. This SS Optimizer from Intuit is brand new. This is the only one on the list that is not free, but it offers a virtual one-stop-shop for calculating your optimal Social Security benefits. For this reason, we're including it on the list as a bonus tool and one well worth investigating.

When you sign up for the Optimizer, you enter very basic information on the first input screen — your name, date of birth and marital status. On the next screen you will be shown what your benefits will be at age 62, plus an optimal scenario reflecting the best ages for each spouse to retire at.

You should first visit the SSA's Retirement Estimator so you can get your benefit at your Full Retirement Age (FRA), so the benefit numbers provided by the Optimizer will be as accurate as possible. You can change the inputs to run different scenarios. The tool also directs you how to apply for the benefits at a given level.

Intuit is offering the Optimizer at a first-year fee of $49.99, then $9.99 for each year thereafter. Renewal is strongly recommended since you will need to update your scenario at least once each year, particularly if your employment or income change. The tool will allow you to run unlimited scenarios.

Readers: Have you ever run estimates of your Social Security benefits? You don’t have to be close to retirement age to do it.

Kevin Mercadante Freelance Contributor

Kevin Mercadante is professional personal finance blogger, and the owner of his own personal finance blog, OutOfYourRut.com.

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