Make Social Security part of your retirement plan

Think of Social Security as a unique planning tool with features that other retirement plans like IRAs and 401(k)s don't have.

Guaranteed income

Similar to an income annuity, Social Security benefits are guaranteed and provide a solid foundation for your ability to meet your expenses.

Inflation protection

Unlike other retirement income sources, Social Security benefits are adjusted to keep pace with inflation. These cost-of-living increases, which started in 1975 with 8%, have ranged from no increase to 14.3%.

A hedge against longevity

Social Security is one benefit you can't outlive. It's like having an insurance policy against running out of money.

Protection against the markets

The U.S. government backs Social Security, so your benefits are immune from the markets' ups and downs.

Tax advantages

Up to 85% of Social Security benefits—never 100%—may be taxed, making these benefits tax-efficient compared with other retirement income.

Risk-free increases

If you can delay taking benefits past your full retirement age (FRA), you'll get an 8% increase for every year you wait past your FRA. That guaranteed percentage number is hard to match in today's economic environment.

The age at which you're eligible for your full monthly benefits, also known as the primary insurance amount (PIA). The Social Security Administration sometimes refers to full retirement age as "normal retirement age" (NRA).

A type of account created by the IRS that offers tax benefits when you use it to save for retirement.

A financial product typically used by investors to save tax-deferred for retirement or to generate regular income payments in retirement.

A retirement plan offered by an employer for its employees. Defined benefit plans (also known as pension plans) promise monthly benefits at retirement. Defined contribution plans (401(k)s and Roth 401(k)s) feature regular contributions by the employer and the employee.

An arrangement under which an employer—and sometimes the employee—makes payments toward retirement, disability, or death benefits for employees who meet certain criteria. Types of pension plans include defined benefit plans, defined contribution plans, employee stock ownership plans, money purchase plans, profit-sharing plans, stock bonus plans, thrift plans, and target benefit plans.

The age at which you're eligible for your full monthly benefits, also known as the primary insurance amount (PIA). The Social Security Administration sometimes refers to full retirement age as "normal retirement age" (NRA).

Delaying the payment of income taxes on earnings generated in an investment account. For example, if you have a traditional IRA, you don't pay income taxes on the interest, dividends, or capital gains accumulating in the account until you begin making withdrawals.

The question many people wrestle with in trying to decide when to take Social Security is: When will I come out ahead?

The decision as to the "right" time to claim Social Security has often been based on a break-even analysis of a retiree's expected benefits, if claimed at different ages, versus his or her life expectancy. The break-even point is the age at which the benefit amounts intersect.

In other words, will the money you'll get by claiming early and getting smaller checks for potentially a longer period of time be more than what you'll get by waiting and getting larger checks for potentially a shorter period of time?

Case study

John is 61 and his full retirement age (FRA) is 66 and 6 months. He gets the following monthly estimates of his benefits by logging on to his account on ssa.gov:

• At age 62: $1,812.50.
• At age 66½: $2,500.
• At age 70: $3,200.

Here are his break-even points for claiming at various ages.

• Between ages 76 and 77 if John claims at age 62 versus FRA.
• Between ages 80 and 81 if John claims at age 62 versus age 70.
• Between ages 84 and 85 if John claims at FRA versus age 70.

The limitations of break-even analysis

Simply looking at a lifetime lump sum ignores 2 key features of Social Security:

• Once you start receiving it, it's paid for the rest of your life, no matter how long you live.
• It's adjusted upward for inflation.

A big concern for most retirees is the risk of outliving their savings. In the case of our hypothetical 61-year-old, Social Security life expectancy tables show his median life expectancy is about equal to the break-even age if he claims Social Security at FRA versus 70.

So if you can afford to do so, deferring Social Security for a few years (even past your FRA to the maximum benefit at age 70) increases your lifetime monthly benefit. And that can help you bridge any income gap you may have in meeting your expenses.

An additional amount that taxpayers age 50 or older can invest for retirement on a tax-deferred basis.

The transfer of assets from a traditional IRA into a Roth IRA. Because Roth IRAs are funded with after-tax dollars, the assets being converted are subject to income tax.

Anna, age 62, is deciding when she should file for Social Security benefits. She's eligible for a monthly benefit of $1,200 now. If she waits until her full retirement age, 66, she'll receive $1,600 a month. And if she delays until she's 70, she'll receive $2,112 a month.

This chart shows the top 5 monthly expenses of the typical American household: $682 for mortgage or rent; $302 for groceries; $166 for car expenses; $61 for household necessities; and $50 for clothing.