Spinning the wheel on Social Security
WHEN TO DRAW | How to decide when to begin payouts
Of all the decisions you face when planning for retirement, none is more important than deciding when to start drawing Social Security benefits.
You can start as early as age 62, even if you're still working full time, but the choices you make become permanent, and could wind up costing a bundle over the course of your lifetime.
(AP)
A growing number of individuals are choosing to take the money and run before they reach their "full retirement age" as defined by the government. But whether that's right for you involves a variety of factors, including your family's health history, your expected cash flow in retirement and whether you plan to work beyond your full retirement age.
"There is no one right answer," noted Marilyn Steinmetz, a certified financial planner who turns 65 this year.
She plans to wait until age 70 to collect her benefits.
"I'll get a lot more money by waiting, I still love working, and I don't need the money at this point," she said. "But you need to do what makes the most sense for your situation, whether it's taking the money early or not."
Here's a run-down of your choices:
• • Begin collecting at age 62. That means that your benefit amount will be permanently reduced to account for the longer period over which you'll be paid. The reduction could be as much as 20 to 30 percent -- depending on when you were born -- compared with what you would have received had you waited until full retirement age. If you plan to work during this time, your benefits will be reduced $1 for each $2 you earn above the limit, which is $12,960 in 2007. That limit is adjusted each year for inflation.
• • Begin collecting full benefits at your full retirement age (FRA). That's 65 if you were born before 1938; FRA has been gradually increased for everyone else -- to 67 for those born in 1960 or later.
If you continue working in the year you hit your FRA, you lose $1 in Social Security benefits for every $3 you earn over a certain limit, which is $34,440 in 2007. Once you reach the month of your FRA, you can earn an unlimited amount without having your Social Security benefits reduced.
• • Wait to collect until you turn 70. That will qualify you for a "delayed retirement credit." The credit can mean your eventual monthly benefit goes up by as much as 8 percent for each year beyond your FRA that you put off receiving benefits.
Does it make sense for you to opt for a smaller benefit earlier, or wait for the larger payment you receive at FRA?
In order to answer that question, you'll have to answer that least favorite of financial planning questions: How long do you think you'll live?
The odds clearly favor longer lives. At age 65 a man has a 60.2 percent chance of living an additional 15 years, and a woman has a 73.7 percent chance of living an additional 15 years. If both husband and wife are lucky enough to reach age 65, there's a 40 percent chance one of them will live to 90.
"You do have to make a guess on mortality rates," noted Ray E. LeVitre, a certified financial planner. He asserts that you could come out ahead taking a smaller benefit earlier if you don't live past what's called your "break-even" age -- the point at which the accumulated value of higher benefits (from postponing retirement) will start to exceed the accumulated value of lower benefits (from choosing early retirement).
Of course, your break-even age isn't the sole consideration when choosing your retirement age.
Will you have health care in place until you reach Medicare eligibility at age 65? "That's a huge issue for those who retire at 62," LeVitre said. You'd need to buy your own policy, or find part-time work that has benefits."
If your spouse has not been employed outside the home, and will rely on survivor's benefits for a substantial part of retirement income, you might need to delay retirement to ensure he or she receives the largest possible survivor's benefit.
Of course there is no retiring from taxes. Keep in mind that you'll owe income taxes on a portion of your benefits if your income from all sources exceeds $25,000 ($32,000 for joint filers). The tax rate increases if your income exceeds $44,000 ($54,000 for joint filers).