When to Take Social Security

Think Before You Leap

    You probably read it in the paper or heard it on the news - the first American baby boomer applied for Social Security last fall; some have said it is the start of the "silver tsunami." The baby boomer generation, over 75 million strong, is now lining up to collect their Social Security benefits.
    My friend's husband was at the head of the line. He decided to bet on a sure thing and take the cash as soon as he turned 62. And he's not alone in his decision. According to an OASDI study released late last year, 76 percent of women and 71 percent of men took early Social Security. But is that the wisest decision?
    It's an important question, since what you decide now will affect how much you can collect in benefits for the rest of your life. Before you start counting that added boost to your income, I recommend you carefully look at the facts and calculate the pluses and minuses in light of your own situation.
You have three choices for when to take Social Security:
. Take it as early as age 62
. Wait until what the IRS designates as your "normal retirement             age" (between 65 and 67, depending on when you were born)
. Or wait as late as age 70
Take Social Security at your normal retirement age and it's simple enough. But collect it early or late, and things become a bit more complicated due to a penalty if you start too early.
If you begin using benefits before your normal retirement age, your monthly check will decrease by as much as 25 percent, and that reduction is permanent. The plus side, of course, is that you'll receive checks for a longer period of time.
Also, if you collect Social Security before your retirement age and you're still working, your benefits will be reduced $1 for every $2 you earn above the annual limit ($13,560 for 2008) - another important consideration. In the year you reach your normal retirement age, it changes to $1 in benefits deducted for each $3 you earn above a higher limit ($36,120 in 2008). Once you hit the appropriate age, your earnings won't impact the size of your benefit.
If you postpone taking Social Security, your benefits go up by 8 percent for every year you delay until age 70. You'll receive bigger checks, but for a shorter period of time. Past age 70, there's no added advantage to waiting.
The actual dollar amount you receive depends on how much you've earned during your working years. Your annual Social Security statement lists your projected benefits at age 62, your normal retirement age, and at age 70. If you need a copy, you can request one at ssa.gov, which is a great resource for all kinds of information.

    This is where it can get complicated; it really depends on how long you live. The longer you live, the smarter it may be to delay taking benefits. You'll receive fewer monthly checks over your lifetime, but the payments will be larger. A longer life span gives more time for those larger checks to make up for the payments you missed by postponing your benefits. But since you can't predict the future, how do you decide?
    You may have heard the term "break-even age." This is how long you need to live to make sure choosing a later benefit date will give you greater lifetime benefits. The "break-even age" depends on the amount of your benefits as well as the assumptions you use to factor in taxes, inflation, and what you might gain by investing your early benefits.
    Let's say you're a top wage earner who's turning 62 this year, and your monthly benefits at ages 62, 66 and 70 are $1,647, $2,233 and $3,019 respectively. Your break-even ages would be as follows:
. Take Social Security at age 62 versus 66 and your break-even age is 77.
. Collect it at 62 versus 70 and your break-even age is 79 and 6 months.
. Start at 66 versus 70 and your break-even age is 81 and 4 months.
    According to the National Center for Health, life expectancy is currently about 78 years. Live past 65 and that expectancy rises into the 80s. If you're in good health and think the odds are in your favor to live beyond the average life expectancy, it might be wise to wait and receive a larger monthly check.
    Before you decide, do the math for yourself. At ssa.gov, you'll find a handy calculator that makes it easy to determine your own break-even age.

    While you might think, like my friend's husband, that money in the hand today is worth more than a few extra dollars in the future, here are some other factors that you might want to consider before deciding when to take Social Security.
. Do you need the cash?
    If you're thinking about retiring early and have planned ahead with enough set aside, you can be flexible about when you take Social Security. But if taking an early, reduced benefit is the only way you can cover the bills, you may actually want to reconsider early retirement, keep earning and saving, and wait until you reach your normal retirement age to start collecting benefits.
. Who's the highest earner in your family?
    If you make the most money in your household, you most likely want to think about survivor benefits. The bottom line is the longer you wait, the more your surviving spouse or other dependents may be able to collect.
. Do you plan to keep working?
    As I already mentioned, if you take Social Security early, earning a wage (including self-employment income) could reduce your benefit. Even at normal retirement age, if your adjusted gross income increases above a certain threshold, taxes may end up eating away at your benefit.

    There's a lot of speculation about the future of Social Security and how long it will be available. But according to the Social Security Administration, it should be in sound shape until at least 2040. Don't feel pressured to take your benefits early out of fear they're going to disappear.
    Rather than worrying about the long-term health of Social Security, focus on your own needs. Weigh all the factors. Get help from your financial planning or tax professional if necessary. And make sure the decision you make, whether you take Social Security early or late, is one you can be happy with for the rest of your life.
Carrie Schwab Pomerantz is Chief Strategist, Consumer Education, Charles Schwab & Co. Inc., Member SIPC. You can e-mail Carrie at This email address is being protected from spambots. You need JavaScript enabled to view it..

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