YOUR RETIREMENT December 6, 2007, 2:21PM EST

Timing Your Social Security Benefits

For retirees with additional income-generating assets, finding the right time to start drawing benefits is the first step to getting the most out of Social Security

"I've earned my Social Security by working all my life and I want to receive everything that's coming to me. What's the best way to get the most money out of my 'investment' in Social Security?" That question comes up over and over again in my conversations with people about retirement planning.

People who are within, say, a decade of retiring, generally know that the longer they wait to start receiving Social Security, the bigger their monthly benefit will be. But they generally do not know how to identify that prime moment to start drawing Social Security income to get the maximum benefit over their lifetime.

Find Your Break-Even Age

Many factors enter into finding the right start-date to maximize your total lifetime benefit. They include whether you plan to earn income from work after age 62, your health status and family medical history, and the amount and type of retirement resources you and your spouse will have to live on in addition to Social Security.

The difference in the amount of benefits you actually receive over the years derives from some basic Social Security rules. First, you may start collecting payments at age 62, but for the rest of your life the only benefit increase you'll receive is the cost-of-living–adjustment (COLA). Second, the longer you wait to start your benefit, the higher your monthly take will be—up until age 70. That's because each year you get an additional benefit bump up. Between your full retirement age (between 65 and 67, depending on the year you were born, which you can check here and age 70, the extra money amounts to about 8% a year. Finally, if you wait until age 70, there's no incentive to delay the benefit. The only future increases you get will be from the COLA, which applies to all Social Security benefits.

This may sound terribly complicated to figure out. But there is one simple exercise you can do to move you closer to an answer: Use the Social Security Web site calculator to come up with your "break-even age." That's the age when, if you start taking your benefit, you are likely to end up receiving the greatest amount of money from Social Security over your lifetime.

How to Run the Numbers

To use the calculator, enter the benefit estimates on page two of your Social Security statement which should arrive yearly about three months before your birthday. These estimates show your anticipated benefit, if you start taking Social Security at age 62, at your "full retirement age," and at 70.

To see how this can work, consider this example using figures from Social Security. Let's say that your starting benefit at 62 is $758 per month. But if you wait until age 70, you'll receive $1,312. The agency calculates your break-even point at age 80 and 11 months.

Here's the fine print: If you started at 62 you would receive a total of $172,066 (227 months times $758) by age 80 and 11 months. If you wait to start until you're 70, then by age 80 and 11 months you would have received almost the same amount—$171,872 (131 months times $1,312). Social Security concludes that if you lived beyond the break-even age, "your total lifetime benefits would be more if you didn't start them until age 70." (These figures don't include COLA's.)

Investment Options

For retirees who are confident of their money-management and investment skills, and who don't need Social Security immediately because they have a pension, an IRA, or plenty of other income, there are other possibilities. Using the same example, one option would be to start Social Security at 62 and invest the entire monthly check of $758 until you reach the break-point of 80 and 11 months. At a 5% return, that money would yield a stash of $283,304, says Kristopher Johnson, a financial planner in Wheaton, Illinois. With a 7% return, you'd have nearly $350,000 to live on in your 80s and 90s or leave to your heirs. Johnson cautions, however, that if you're living on taxable IRA withdrawals or a pension, taking the benefit could significantly increase your annual tax bill.

Another possible approach comes from Bert Whitehead, a financial planner in Franklin, Mich. Take the benefit at 62 and invest it up until you turn 70. Then start spending some of the money you've earned from that investment to live on. Investing the $758 a month benefit at age 62 and receiving a conservative, 5% annual return for eight years, you would save $89,616.

Whitehead suggests that under this scenario, at age 70, you could spend the monthly $758 benefit you receive, plus $554 from the total investment earnings of $89,616, to reach the $1,312 monthly benefit you'd have received by waiting until age 70. At this rate your break-even age will be 92. "And if you got a return on the money of 6%, your, break-point would be when you're almost 101 years old," Whitehead says.

Other Factors to Consider

These examples are just that: The numbers are simplified, and every individual's situation will be different. So once you've checked your own break-even points on the Social Security chart, be sure to consider other key factors that enter into the decision. These include: Whether you plan to keep working at least part-time; your health status and family longevity; and all of your financial resources and prospects for the future—and, if you're married, the same data on your spouse.

For many Americans, there's no debate about when to start taking Social Security, because it's the only thing that will keep them out of poverty. But if you have other assets that will generate retirement income, you owe it to yourself to research all the options—if necessary, with a financial adviser who can calculate your best scenarios on a computer program—before signing up for your benefit.

Hoffman is the author of The Retirement Catch-Up Guide and Bankroll Your Future Retirement with Help from Uncle Sam. Her Your Retirement column may be found at businessweek.com/investing/. You can contact her through her Web site, retirementcatchup.com.