When should you begin taking Social Security payments?
The process that many people use to answer this question is more reflexive than contemplative. A lot of folks have already predetermined what their magic number is. At age 62, they can start collecting Social Security and they want what they've earned - NOW!
If you've saved little and are unable to work any longer, there's little need for an angst-filled examination of various scenarios. If you can't survive without early Social Security checks, you can keep the calculator in the drawer and take the reduced early-bird benefits.
For everybody else, however, there's a financial advantage to poking sticks at the actuarial beast created by the Social Security Administration. But you can't begin to formulate an intelligent attack plan until you understand what your options are.
Here's a glimpse of what's at stake: If you paid the maximum in Social Security taxes for most working years and you retired at your full retirement age in 2006, you'd be entitled to receive $24,685. The government arrives at your benefit by looking at your 35 highest earnings years in a span that reaches back to age 22. If you started the payments at 62, however, the yearly benefit would shrink to $18,437. If you held off until your 70th birthday, you'd pocket $34,184 that first year.
People often assume that they'll come out ahead if they grab their benefits at the first opportunity, but that's often wrong. For the eager beavers, the benefit will shrink depending upon when they were born and how early they grab the cash. If you were born in 1937 or earlier, the reduction in your benefit is 6.7 percent a year, up to 20 percent, if you start the checks three years early. The federal government's actuaries aren't slouches. They've calculated payments so Americans with the typical life span will collect the same amount of money regardless of when they start cashing their checks. Typically, the break-even age is 78. If you live longer than that, it would've been better to delay your Social Security.
Here's an example: Suppose you were grappling with receiving a yearly $15,000 benefit at age 62 or waiting until full retirement age for a $20,000 benefit. Regardless of which choice you made, when you are 77 years old, you would've pocketed the exact same amount of money. But if you made it to your 78th birthday, you'd be financially rewarded if you had the patience to wait those few extra years. Meanwhile, if you'd postponed receiving any benefits until 70, your benefits, by the time you reached 80, would exceed all the Social Security cash you'd have pocketed if you started collecting checks at age 62.
Of course, none of us knows when we'll fold our last napkin, smell our last rose and take our last breath. For some people, family history may provide a clue. For those who aren't satisfied with making a wild guess, you may want to use the calculator at www.livingto100.com, which asks you dozens of questions before arriving at your anticipated life expectancy. When I tried it, the calculator suggested that I'd live to 94, but if I stopped eating bittersweet chocolate twice a day I could add another 1.75 years to my life.
Didn't sound like much of a trade-off to me.
If you're married, however, your actuarial gymnastics are even more complicated. Sadly, what many couples don't consider when weighing things like Social Security break-even points is what could happen when one of them dies.
In too many cases, a husband who earned the bigger paychecks could be condemning his wife to future poverty if he takes Social Security early.
(Obviously, the same thing can happen if the wife is the family's power earner.) For couples, there's a great benefit for delaying Social Security, especially if one spouse is a low-income worker or didn't work outside the home, says Henry K. Hebeler, the author of "J.K. Lasser's Your Winning Retirement Plan" and the creator of AnalyzeNow.com, an excellent resource for retirement software.
Hebeler's Social Security calculator is free, and you can also read articles the former aeronautics executive, who has three degrees from MIT, has written on the topic. On his Web site, he receives more questions on timing Social Security payments than any other subject.
"If the high-income spouse takes Social Security at 62, it's a major penalty to the surviving low-income spouse," Hebeler says. When a low-income spouse becomes a widow or widower, he or she can take either 100 percent of the higher wage earner's benefit or his or her own smaller one. "If you are married and more gutsy, you can make a very good case for the high-income spouse to delay till age 70 and the low-income spouse to delay till his or her full retirement age."
People should also look closely at the assumption - I'd call it a brash one - that they can take the smaller early payments, invest the cash and come out ahead financially. For starters, if you're 62 when you take Social Security benefits and you continue to work, your benefits will be reduced by $1 for every $2 earned above a certain amount. This year, it's $12,480.
There are plenty of other reasons why you might not want to try this. If you're tempted, you should take a look at an analysis that T. Rowe Price did on this and other Social Security options in its fall issue of the T. Rowe Price Report. You can find the report at the mutual fund's Web site at www.troweprice.com by typing "Price Report archive" into the site's search function.
By the way, if you began drawing Social Security checks at 62 and regret it, you can buy your way out of the mistake. You must file a "withdrawal of claim" and return the money. But at least you don't have to pay a penalty or interest.