A Smarter Way to Think About Social Security

Planning for retirement is one of the biggest financial challenges you'll ever face. With a goal that's so far in the future and with so much uncertainty about what your finances will look like by the time you retire, it can be tough just getting your fingers around the scope of the problem, let alone actually coming up with smart strategies.

But one thing that can help you simplify your retirement planning is to integrate your finances rather than separating them into different buckets. If you can unify your retirement assets into a single cohesive structure for planning purposes, you may find it a lot easier to figure out how to make some key decisions that will have a huge impact on your retirement lifestyle. And one of the biggest assets every American has is Social Security.

When to take Social Security
When it comes to key retirement issues, few things loom larger than deciding when you should start taking Social Security benefits. On one hand, you can start taking benefits as early as age 62. But by electing to receive checks earlier than your normal retirement age, the size of those payments will be smaller -- as much as 25% smaller than if you had waited.

On the other hand, you can also elect to wait beyond your normal retirement age. If you choose that route, Social Security rewards you with boosted payouts -- as much as a third more than your normal benefits, if you wait until age 70 to take benefits.

Add those two things together, and you get checks that can differ in size by more than 75% depending on when in the eight-year span between 62 and 70. And given that the choice you make will affect those payments for the rest of your life, you can't afford to make a mistake.

Looking beyond life expectancy
Many retirement experts look at the Social Security decision solely as a question of maximizing total benefits. For instance, if you think you'll live beyond your actuarial life expectancy, then waiting as long as possible to start getting Social Security checks often leaves you ahead in the long run. But if you have reason to think you'll fall short of typical life expectancies, then taking the early money and running can often make more sense.

But there's another aspect to Social Security payments: timing. Depending on your other resources, Social Security may give you a source of income when you need it most, letting you avoid alternative ways to generate much-needed cash that could cost you a lot more in the long run.

Getting through a rough patch
One example of how Social Security can save you is when you need more time to ride out a bear market. Retirees in 2008, for example, emerged onto the scene of the worst economic environment since the Great Depression. Mainstream companies found themselves in dire straits, with Ford (NYS: F) struggling to avoid the bankruptcy fate of its fellow Big 3 automakers, and Bank of America's (NYS: BAC) share price collapsing under the weight of mortgage exposure gone wrong.

With cash at a premium, Dow Chemical (NYS: DOW) , General Electric (NYS: GE) , and countless other companies with long histories of dependable dividends had to cut their payouts to investors. That sent already-beaten-down shares plunging even further and left shareholders with a new challenge: how to replace their lost dividend income.

Without Social Security as an option, many retirees who owned those stocks and others like them might have had to liquidate everything. But with Social Security providing at least some income support, brave retirees were able to muscle it out for another couple of years. In many cases -- although certainly not all -- that was long enough to let those stocks rebound and give retirees a much better exit point to implement less aggressive investing strategies.

Money is money
Sure, making a smart Social Security decision depends on running a lot of numbers to figure out what works best for you. But one key to remember is Social Security's role as a safety valve that can help support you when all your other income sources fail you. If you keep Social Security in reserve for when you really need it, then you shouldn't be afraid to use it when the need actually arises -- especially if it fits in with the strategy you're using with your investment portfolio.

Along those lines, smart investing can give you more latitude to make the most of Social Security. Learn to be a better investor by reading the Fool's special report, "3 Stocks That Will Help You Retire Rich." Get your free copy today, while it lasts!

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The article A Smarter Way to Think About Social Security originally appeared on Fool.com.

Fool contributor Dan Caplinger is feeling optimistic about getting something from Social Security eventually. He doesn't own shares of the companies mentioned in this article. You can follow him on Twitter @DanCaplinger. The Motley Fool owns shares of Ford and Bank of America. Motley Fool newsletter services have recommended buying shares of and creating a synthetic long position on Ford. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy is the smarter way.

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