Legions of retirees are entering their golden decades without any reliable source of retirement income other than Social Security. These folks are not likely to be your clients. Nevertheless, it's still unlikely that the bulk of retirees will have sufficient personal savings to fund a long retirement by themselves. In addition, as of 2005, just 21% of workers in the private sector were covered by a pension, according to the Bureau of Labor Statistics. "For people who don't have pensions, Social Security will become critical," says Naples, Fla., planner Ruth Forehand.

Yet people often don't come up with a sophisticated Social Security plan. Thinking about Social Security early could yield numerous options for helping clients receive the maximum possible benefit.

A TANGLE OF RULES

Unfortunately, the program's rules are so complicated it may be difficult for clients to navigate this invaluable retirement asset. "If you call the Social Security help line with a question, you'll get a different person with a different answer every day," observes Christine Fahlund, vice president of retirement services with T. Rowe Price in Baltimore.

Planners say they're increasingly called on to help clients figure out how to manage their benefits. "One client even asked me to go with her to meet with a Social Security agent," says Betty Custer of Custer Financial Services, an affiliate of Lincoln Financial in Madison, Wis. "She was afraid she wouldn't understand everything."

There's an opportunity in this confusion. "Advisors shouldn't write Social Security off. An advisor who wants to compete in that area needs to get up to speed," says Dan Kiley, president of the Retirement Corporation of America in Cincinnati.

WHEN TO COLLECT

A Social Security optimization strategy takes into account several factors, not least of which is when to take the benefit. Kiley recommends starting to factor in every retirement income source at least 36 months before the big event. Typically, it's the well-heeled who agonize most about how to implement a strategy. "The people who have other assets and jobs are the ones who find it very complicated to decide what to do, because all the decisions have consequences," says Brett Hammond, chief investment officer of TIAA-CREF in New York.

The first big decision is when to begin collecting benefits. Although people become eligible for Social Security at age 62, benefits are reduced from 5.5% to 6.5% per year prior to full retirement age--which is now between 65 and 67, depending on date of birth. A client who waits until after reaching full retirement age to make a claim will get a hike in benefits of 8% per year, until maxing out at age 70.

For anyone who's still working, it makes no sense whatsoever to collect benefits before full retirement age. The reason: Working claimants will forfeit $1 of benefit for every $2 earned above $12,960, which in many cases could wipe out the benefit altogether. For example, a client might become a consultant at age 65, sometime after her official retirement. Assuming this client earns $45,000 a year from this venture, she'll surpass the income threshold by about $32,000. Therefore, she would forfeit $16,000 of her yearly benefit, or $1,335 per month. After full retirement age, there's no reduction in benefits for working. Likewise, there is unanimous agreement that no one should wait beyond age 70 to collect benefits, since there is no added bump up in benefits.

It's what to do in the middle years, from age 65 to age 70, that is subject to debate. In academic and financial services circles, the advice is to delay the benefit as long as possible in order to get the largest monthly check. Financial advisors who counsel clients in their offices, however, tend to argue for taking the benefit as soon as it's available, even if that means locking in a reduced amount. One reason: For many seniors, claiming benefits early means they'll likely collect a larger total amount over their lifetimes.

Betty Custer likes her clients to take Social Security once they stop working but before full retirement age because the income stream allows them to take additional investment risk with other assets. This offers them a better chance to grow their assets.

Ruth Forehand, meanwhile, doesn't believe that most people should wait much longer after the first year of their full retirement age, assuming they're no longer working. For people of limited means, however, she believes that pushing off Social Security as far as possible, and maximizing the monthly payout, may be the wiser move. Women, who tend to outlive men, could also benefit from this strategy.

According to Bill Reichenstein, finance professor at Baylor University in Waco, Texas, waiting is a wash for people with average life expectancies; they'll reap the same amount of money, more or less, by taking the benefit early as they will by waiting for higher benefits. But for those who are likely to live beyond the average (the affluent often fall in that group) it's worth the wait.

Among retirement experts at firms like T. Rowe Price, TIAA-CREF and Charles Schwab, Americans' longevity gains have drastically changed their thinking . Today, a 65-year-old couple faces a 40% chance that one of them will live to age 90. Delaying Social Security until age 70 lets that couple lock in nearly twice as much inflation-protected income--perhaps for decades. "If you can wait, then wait," says Rande Spiegelman, vice president of financial planning with the Schwab Center for Investment Research.

The reasoning goes like this: Social Security provides lifelong, inflation-adjusted, government-guaranteed income--and it makes sense to maximize it. "Think about it this way," Fahlund says. "The amount of additional income that you can get by waiting is the equivalent of saving an additional half-million in your nest egg. That's pretty cool." With top benefits of about $30,000 a year in today's dollars, a couple would need to save $1.2 to $1.5 million to be able to access that amount each year at a 4% to 5% withdrawal rate.

Spouses need to think about Social Security carefully, especially if one spouse is younger and has earned significantly less than the other. It might behoove an older spouse to wait until age 70 to receive benefits, even if the younger spouse starts Social Security as soon as possible. When the older spouse dies, his or her spouse steps up to the higher benefit. "My wife is six years younger than me," Reichenstein says. "In all probability she is going to live 10 years longer than me, so she'll get that higher benefit for the 10-year period after I'm gone. That's pure gravy."

Ultimately, however, these are all considerations for clients, rather than set-in-stone formulas. As Social Security accommodates the coming wave of baby boomers, the rules are likely to get even more complicated. There could be additional restrictions on eligibility, such as raising the retirement age or implementing means testing. As the system becomes ever more confusing, retirees will rely on their financial advisors to help them deal.

Ilana Polyak is a frequent contributor to Financial Planning.

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