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The right time to start drawing Social Security benefits

Each year, a few months before your birthday, you receive an innocuous little four-page Social Security statement from the government that could have a big impact on your golden years. Unfortunately, most of us don't take the time to give it more than a cursory glance before tossing it in the nearest circular file.

But the closer you get to decision time, on when you will officially retire and begin tapping the Social Security benefits you've accrued over the years, the more this simple statement can help you determine when retirement might make the most sense -- in dollars and cents -- for you.

Yes, Social Security figures prominently as a safety net for you and your family, should you die suddenly or become disabled. It is also the place to enroll in Medicare; you want to do that at age 65 regardless of whether you retire.

But, determining when to start collecting regular Social Security retirement benefits requires some forethought. Here's how to work through the math to determine when to officially retire and begin receiving your monthly checks.

How benefits are calculated
Let's start with the basics: your Social Security number. It has been used on every tax form you and your employers have sent in since your first day of work to keep track of your earnings. To be fully insured, you need 40 credits earned over your lifetime. You get up to four credits per year based on your earnings. For 2005, you receive one credit for every $920 you earn, so you max out your four credits with an annual income of $3,680 or more.

That's a pretty easy bar to clear, by design: Social Security sprang from the depths of the Great Depression to enable all working Americans to survive when their prime earning years are behind them. Financial planners estimate that Social Security benefits today provide, on average, about 40 percent of what you'll need to maintain your lifestyle once you hang up your dancing shoes.

OK, so just about everybody approaching retirement age qualifies for Social Security. However, the Social Security Administration calculates your benefit amount based on your average earnings over 35 years, not on your number of credits or how much you paid in taxes. That's why it is important to look at page three of your statement, which lists your earnings history year by year, and make sure the figures match up with what you actually earned.

Jack Carney, 57, an accredited asset management specialist with M.W. Boone and Associates in Bellevue, Wash., explains that in calculating your eventual benefit amount, Social Security caps the maximum wage contribution each year. For 2005, the wage contribution cap is $90,000, and the maximum monthly benefit amount at full retirement is $1,939.

"The way it works is, if I made $7,200 my first year out of college, that counts as much toward my Social Security as someone this year making $85,000," says Carney. "If the (wage contribution) cap was $8,000 and you earned $6,000, you get credit for three-fourths of a maximum Social Security benefit year."

How does this figure into retirement planning?

Next: "Oh, and about those milestone ages ..."
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