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The other great Social Security debate
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It's true that we really have no idea how secure our Social Security benefits may be in the years ahead, but despite uncertainties we have to operate under certain assumptions. So let's look at the decision as if Social Security will be around in its current form for the next couple of decades at least, and hope for the best.

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Obviously, the one variable in the equation that would make the decision easy would be to know our own expiration date. How long will we live? Unfortunately, or maybe fortunately, this is an unknown. But we can think about our genetic predispositions, judging by how long our ancestors have hung on, and determine the probability of a long versus short retirement. If you think you might live a long time, and you have the means to wait, would it make sense to do so?

A logical way to analyze the early-versus-later question would be to consider the break-even point -- the age where you'd come out ahead if you wait until the normal retirement age, age 66 in the above illustration, to begin collecting benefits.

If you go through the Quick Calculator exercise, the Social Security Web site does the math for you. In the above example, you would have to live to nearly age 76 to recover the benefits lost by waiting until age 66 to begin collecting. But if you expect to live into your 90s because longevity runs in the family, it might be better to hold off collecting funds until you've reached normal retirement age or even later. (There is no financial advantage to waiting beyond age 70.)

Financial planners look at the time value of money. If you begin collecting $980 per month at age 62 and invest the money rather than spend it, how much would it be worth in 20 years? Assuming a return of 5 percent, it would be worth about $389,000. If you wait until age 66 and invest the money and it earns the same rate of return, it would take roughly 16 years to accumulate the same pile of money. In either case, you're 82 years old. But then, henceforth, your monthly check is either smaller or bigger.

Avoid this big boo-boo
Let's face it: Most people are going to spend the money rather than invest it. However, there are other variables besides longevity to consider. If you're in the "I'll work until I drop" crowd, or you want to work at least until your normal retirement age, it would be a huge mistake to begin collecting at age 62. That's because if your earnings exceed a certain paltry amount -- $12,480 in 2006 -- you lose $1 of Social Security benefit for every $2 of benefit that you earn over that limit. The Social Security Web site explains in detail how it calculates the reduction, but it essentially amounts to a 50 percent surtax on your benefits. That's a huge price to pay for staying in the work force and collecting benefits early, considering that you'll be stuck with a lower payout for the rest of your life.

 
 
Next: "Collect early -- or wait?"
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