Social Security


The Social Security Age Dilemma

EDITOR'S NOTE: This article was originally published in the December 2007 issue of Kiplinger's Retirement Report. To subscribe, click here.

To claim or not to claim Social Security -- that's the question facing nearly 80 million baby-boomers as the first wave of them turn 62 next year. To underscore the demographic milestone, the Social Security Administration staged a media event recently to witness the nation's oldest baby-boomer, Kathleen Casey-Kirschling, as she applied for her retirement benefits online three months before her 62nd birthday on January 1.

But just because boomers can claim benefits early doesn't mean they should. In the past, the majority of retirees chose to start collecting benefits when they were eligible at 62, even though it meant accepting reduced benefits for the rest of their lives.

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If you were born between 1943 through 1954, you can collect full benefits at 66. Start collecting at 62 and your monthly checks will be permanently reduced by 25%. For each year you delay beyond 66, you'll receive an extra 8% until you reach age 70.

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"There's a tendency to grab the bird in hand and collect benefits as soon as you can," says Conrad Ciccotello, a professor of financial planning at Georgia State University. "But longer life expectancies make that decision to take benefits early less appropriate."

Unfortunately, there's no consensus on the magic age. Over an average lifetime, the total value of the higher benefits taken later equals the total value of the smaller benefits taken earlier. Once you live beyond your "break-even" age (which you can calculate at www.ssa.gov), you would have been better off waiting to collect full benefits.

For many people, the choice of when to start Social Security benefits is clear-cut. If you need the income to make ends meet, take your benefits early.

Sometimes it's obvious that you should wait. If you plan to continue working and expect a substantial income, you should delay collecting benefits. Otherwise, you will lose $1 in benefits for each $2 you earn over the earnings limit of $13,560 in 2008 if you are younger than 66.

Say that you qualify for early benefits of $18,000 a year and your part-time job pays you $50,000 -- $36,440 above the earnings cap. If you claim early, you'll forfeit all of your benefits because your earnings above the cap are more than double your benefits.

"If you have high earnings, there is no discussion -- you're not going to take benefits," says Steven Feiertag, a certified financial planner in Royal Palm Beach, Fla. You can also use the earnings-test calculator on the Social Security Web site.

There is some good news: A more generous earnings cap applies the year that you reach your normal retirement age. Once you hit your birthday, the earnings limit will disappear. And when you reach full retirement age, your benefits will be increased to take into account those months in which benefits were withheld.

Remember, you can start taking benefits at any time between age 62 and 70. Up to age 66, the reduction will be smaller if you wait longer. For instance, if you take your benefits at age 63, your benefits will be reduced by 20%.

How Long Will You Live?

For most other situations, the right age to start benefits may be less obvious. You'll need to consider other sources of income, your investment style and the impact of benefits on a surviving spouse.

A major factor to consider is your likely life expectancy. Determining your break-even age can be helpful. The earlier your break-even point, the more it makes sense to wait -- especially if you expect to live much beyond that age.

For example, a 62-year-old who takes a reduced benefit of $1,425 a month would receive the same total benefits by age 77 and 11 months (based on 2007 dollars) if he or she takes the full retirement benefit of $1,900 at 66. If the beneficiary lives beyond that break-even age, waiting to collect would be the better option.


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