It Pays to Get Smart on Social Security

[Jerry Croteau]

It Pays to Get Smart on Social Security

There has been a great hue and cry during the last decade about the future of Social Security. Indeed, the system may look quite different for future generations than it does for today’s retirees. But Social Security remains a vital piece of the retirement income puzzle for investors who currently are approaching or are in retirement. Since you’ll eventually be among them (and you will have spent your entire career paying into the system) you’ll want to make sure to reap the maximum benefit from the payments you have coming to you.

You may start receiving Social Security benefits as early as age 62. Indeed, as many as 70% of Americans take Social Security prior to full retirement age. Taking benefits early will result in smaller monthly payments, however. Conversely, you can opt to receive monthly payments that are higher than your full benefit by taking them later than full retirement age. You won’t receive any additional benefit for postponing past the age of 70, however, so there is never any reason to delay benefits past that point.

Taking benefits early can reduce your monthly check by a considerable amount. For example, a 62-year-old in 2007 who opted to take benefits immediately would receive a 25% smaller monthly payment than he would if he waited until 2011, when he would reach his full retirement age of 66. What’s more, the potential spouse’s survivor benefit would decline by 30%.

Likewise, waiting to take benefits can boost your monthly payment considerably. For example, a 66-year-old in 2007 would increase his monthly check by 7.5% for every year he postponed benefits—so waiting until age 70 would result in a 30% larger monthly payment. The decision about when to take benefits can be complex and will be different for every individual. You may want to consult a financial adviser to help you work through the various factors involved, which can include the following:

Your cash needs. If you need Social Security to help cover expenses—for example, because medical issues ended your career prematurely—you may not be able to afford to wait until full retirement age. That said, many Americans will find that working a bit longer and delaying benefits as long as possible offers a surer route to financial security. That’s in part because postponing benefits may ensure a stronger stream of guaranteed income later in life, when you may need that money more.

Your spouse’s potential needs. The longer you wait to receive benefits (up to age 70), the larger your spouse’s survivor benefit will be—so you may choose to delay benefits if you are concerned about your husband or wife’s future financial security.

Whether you intend to work during retirement. If you are younger than full retirement age, Social Security will deduct $1 in benefits for every $2 you earn over a certain threshold ($12,960 in 2007). For example, if in 2007 you took early benefits and earned income of $25,000, you would exceed the income threshold by $12,040—reducing your benefits by a total of $6,020, or about $500 per month. The reduction is smaller for Americans in their FRA years: Social Security will reduce the benefit that year by $1 for every $3 earned over a higher threshold ($33,440 in 2007) and will include in that calculation only income from months prior to reaching FRA. Generating employment income after you reach full retirement age does not reduce your benefit.

Your break-even age and life expectancy. You may want to plan so that you receive the maximum total income from the Social Security system over the course of your retirement. Taking benefits early will give you more payments over your lifetime, but waiting until full retirement age or later will mean you’ll get larger checks—and the longer you live, the more time those larger checks will have to make up for missing out on earlier payments.

To compare the benefits of taking Social Security at two different ages—say, 62 versus 66—you can calculate your break-even age: the age to which you must live for the later benefit date to produce greater total lifetime income.

The Social Security Administration’s Web site, SSA.gov, offers an example of an American who was born in February 1942, giving her a full retirement age of 65 years and 10 months. Her monthly benefit at FRA would be $1,000 per month; if she had taken benefits at 62, her monthly payment would have been $758. Her break-even age for taking benefits at full retirement age rather than at age 62 would be 77 years and 10 months: At that age the two approaches would have provided the same amount of total income, so if she lived past that age the larger payments provided by delaying would provide greater total income. SSA.gov offers a calculator to help you determine break-even ages for taking benefits at various times.

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