When to collect Social Security

You'd think deciding when to collect Social Security would be as easy as choosing lemon or sugar for that glass of iced tea you plan to enjoy as you rock away retirement on your front porch.

Don't kid yourself. You're dealing with the federal government. Figuring out whether to take benefits early or wait for full retirement can make all your hair gray.

Social Security law lets you retire with reduced benefits at age 62. For those born in 1937 or earlier, that lower benefit is 80 percent of the amount available at the full retirement age of 65.

Starting this year, full retirement age will rise for everyone born in 1938 or later. To further ease pressure on the federal pension system, baby boomers born between 1943 and 1954 won't collect full retirement until they turn 66. After that, the age will rise in two-month increments until full retirement reaches 67 for those born in 1960 or later.

Confused? Use the calculator at the bottom of the Social Security Web page to pinpoint the precise month you'll be eligible for full retirement.

Weighing collection odds
Once you find out exactly when you can get full benefits, you must decide whether it's worth the wait.

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If you take benefits at 62, your Social Security income will be permanently reduced. But because you draw benefits longer, you could come out ahead, depending on how long you live.

Actuaries who calculate insurance and annuity premiums believe the government has done an accurate job of assessing average payout. So whether you take the reduced benefit early or wait until full retirement, the odds are you'll get the same amount of money, says Bruce Shobel, an actuary at New York Life Insurance and chair of the Social Insurance Committee of the American Academy of Actuaries.

But as any Vegas regular knows, there are always winners and losers so it's worth it to weigh your chances before betting on when to collect Social Security.

Start by finding out exactly how much Social Security you'll be entitled to by requesting an earnings statement. When it arrives via snail mail in about a month, you'll see a year-by-year breakdown of earnings; estimates of retirement benefits before age 65, at full retirement age and at age 70; the number of earnings credits needed to retire; and the number of credits you have accumulated.

Math time
With your SSA statement in hand, prepare to do some math.

Take the case of Joe Citizen, born in 1940. He's worked hard and is entitled to the maximum monthly Social Security check of $1,382 if he retires now at age 62. But by waiting for full retirement, he'll be eligible for $1,658. Regardless of which he chooses, he'll get annual cost-of-living increases. Since there's no way to predict how much those will be, let's stick with the basic numbers.

Despite full-retirement payments, Joe wouldn't come out ahead of his early Social Security take until he turns 80. And a boomer who loses 25 percent of benefits by claiming Social Security before 66 would have to hit 82 to make collecting full benefits worth it, even with the more severe cut in benefits.

So why wait? Some knowledgeable people say you shouldn't.

In an article for the National Estimator, a publication of the Society of Cost Estimating and Analysis, John Detweiler weighed the early-pension benefits against life expectancy. The retired cost analyst concluded that the probability of doing better by taking Social Security at age 62 is 87 percent for a man and 71 percent for a woman because she lives longer.

But Detweiler, who will retire in 2003, may not follow his own advice. He's still working and there's a severe benefit penalty for people who collect Social Security early and earn wages. In 2002, wage earners younger than the current full retirement age of 65 will lose 50 cents in benefits on every $1 they earn over $11,280. Another SSA calculator will help you determine what you could lose.

Once you reach full retirement age, the loss of benefits is no longer a worry. Congress lifted that earnings limit in 2000. But then you must consider taxes.

The federal government excludes from taxes a portion of Social Security income, but after retirees earn a certain amount (depending on filing status), Social Security is taxed as ordinary income. Everybody's tax situation is different, but actuary Shobel believes that for most people with earned income, taking Social Security later rather than earlier makes more sense.

"Otherwise you take a double hit," he says, "penalized by both Social Security and the IRS."

Other reasons to delay
You also might want to postpone collecting Social Security benefits if:

You want to erase low benefits. Social Security is based on a complex algorithm. Actual earnings are first adjusted for inflation, then calculated on average monthly indexed earnings during the 35 years in which you earned the most. If you have years when you didn't earn anything, zeros will be factored in for those years, lowering your benefits considerably. Delaying benefits and working between age 62 and full retirement can significantly increase the amount you'll be eligible to receive, says Social Security spokeswoman Martha McNish.
You want to improve a spouse's benefits. A spouse can collect benefits on his or her own record or get half of a spouse's benefits. If a spouse hasn't worked much under Social Security, it may be advantageous for the spouse with the better record to wait until full retirement age. This will provide additional income for the lower or non-earning spouse right away. And upon the death of the spouse with the higher earnings, the survivor can claim the deceased's full benefit. This works for divorced spouses, too, if the couple was married 10 years.
You have a family history of longevity. Did your grandparents live long and healthy lives? If you think you inherited their genetic stamina, consider delaying taking Social Security. Beginning at about age 82, people who wait until full retirement for benefits sprint ahead in total dollars collected. And if you wait until age 70 to start collecting, you'll realize a bonus of 34 percent over what you'd receive at full retirement age. If you don't have a hefty nest egg or another pension plan, this could be a wise move.

Still not ready to wait for full benefits? Then consider the bird-in-the-hand approach.

If you don't need the money before full retirement age, take your benefits early anyway and invest them. A monthly deposit of Joe Citizen's $1,382 check for four years at a modest 5-percent interest rate compounded monthly would yield a savings balance of $73,267. That's a nice chunk of change for anyone's golden years.

Jennie L. Phipps is a contributing editor based in Michigan.

-- Updated: April 18, 2003