retirement

The right time to draw Social Security benefits

How does this figure into retirement planning?

"Say you're 62, and you're going to continue working for one more year. If I already have 35 years at the maximum, that additional year is not going to increase my base at all," Carney explains. "However, if I only have 34 years in, even if I only make $10,000 this year, that is actually going to increase my base, as well as increase my dollar amount, because I will be a year older before I begin drawing."

Oh, and about those milestone ages on your statement:

Milestone ages for Social Security
  • Age 62 is the minimum age at which anyone can draw Social Security retirement, though we sometimes confuse it with 59-and-a-half, which is the minimum age you may tap into many IRAs and retirement accounts without penalty.
  • Age 65, 66 or 67, depending on your birth date, is the age at which you can claim full retirement benefit amounts.
  • Age 70 is the maximum age for purposes of estimating Social Security benefits.

Actual benefit amounts available to you between these ages are calculated on a monthly basis. You can get very precise estimates by using the detailed calculator, at the Social Security Administration's easy-to-use Web site, www.socialsecurity.gov.

The Vegas factor 
This brings us to the Vegas factor: your estimated benefits, listed on page two of your statement. A typical baby boomer's numbers might look something like this:
Estimated benefits
  • At age 62, your payment would be $780 a month.
  • If you work until age 66, your payment would be $1,080 a month.
  • If you work to age 70, your payment would be $1,464 a month.

These estimates aren't fixed in stone; they're based on elaborate actuarial calculations that include assumptions that you will continue to earn about the same annual income you made during the last couple of years, and that your life expectancy will be somewhere around what they expect it to be (the current national average is about 77 years).

If we do the math based on living to 77, we get the following total payout over the years we draw out, which does not include any interest that could be earned with that money:

Estimated benefits
  • At age 62, your payment would be $780 a month.
  • If you work until age 66, your payment would be $1,080 a month.
  • If you work to age 70, your payment would be $1,464 a month.

That's right, despite the rather large discrepancy in the monthly benefit estimates, if you live the average lifespan, you may be better off retiring earlier; especially if you think you can invest the money at a better return than Social Security estimates it will make at the Treasury-bond rate.

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"Actuarially, the government figures it out so it all works out the same; they're not trying to push people to take it out early, or to take it out late," says Michael Boone, CEO and charter financial analyst at M.W. Boone. "There are two issues here: They're assuming you're average, and they're assuming their rate of return. The question you have to ask yourself is: Are you average, and what could you actually do with the money if you got it earlier?"

 

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