It may not look much different from your standard piece of junk mail, but the Social Security statement that arrives in your mailbox shortly before your birthday every year is far from junk. While many will trash it sight unseen, those who are nearing retirement may want to instead sit up and take notice.

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 2007, you receive one credit for every $1000 you earn, so you max out your four credits with an annual income of $4000 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 2007, the wage contribution cap is $97,500, and the maximum monthly benefit amount at full retirement is $1,998.

“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?

“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,

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.

“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?”

Or, as Dirty Harry might put it, are you feeling lucky?

The wellness factor

Seriously, how healthy do you feel? Are you physically active, in relatively good shape, no bad habits or life-threatening health problems to speak of? Did everyone in your family live into their 90s?

If so, you may want to wait for the larger payoff.

“If you live longer than they expect, you are actually better off, all other things being equal, to wait,” says Boone. “The reason for this is you’re getting a larger dollar amount, but you’re getting it longer than they thought.”

The difference could amount to a windfall over time. Say you live to 90, your 20-year monthly benefit of $1,464, retiring at 70, will reap a total payout of $351,360 versus $262,080, if you retire at 62.

But if you have health problems or other issues that may shorten your life, you might want to retire earlier.

“If you live a shorter period of time, you would be better off taking it earlier,” says Boone. “That extra three, four, five years of payments is going to make a big difference for you.”

Then again, if you’re an active investor who routinely outperforms the stock market, having the money earlier may enable you to better the guaranteed payout from Social Security.

For instance, let’s imagine that you have other financial resources, so you deposit your monthly Social Security checks in an investment account that consistently earns 10 percent, on an annualized basis (an unlikely scenario, but we’re pretending). If you retire at 62 and deposit $780 per month, by age 77 you’ll have amassed $323,287. But if you wait until 70 to begin drawing benefits and then start investing $1,464 per month, by age 77 your account will have grown to $177,071.

The potential for higher returns in the stock market underpins the main philosophical argument behind President Bush’s push to privatize Social Security. The problem is, the stock market is risky, so the downside of privatization, of course, is: What will become of those whose investments underperform?

The working retiree

The other part of this equation, particularly for go-go baby boomers, is the question of working after retirement.

Can you work and retire? The answer is yes, up to a point.

You may have heard some working retirees remark that they’re “working for the government,” and in a sense, they’re right. If you work and are under full retirement age for the whole year, the government deducts $1 for every $2 you earn above the annual limit; the limit for 2007 is $12,960. In the year you reach full retirement, it deducts $1 for every $3 you earn above a different limit: $34,440 in 2007. Once you reach full retirement age, you may earn as much as you like without loss of benefits.

Fortunately, if you work during the in-between years, that income, combined with delaying your retirement, will increase your ultimate benefit amount.

Yes, you can work after you retire. But should you?

“If you’re going to work full time, the answer is no,” says Carney, “because anything you make above the threshold of $12,960, they subtract 50 cents on every dollar. So at some number up in the $20,000 to $30,000 range, you, in essence, lose all of your Social Security benefits.”

One popular way some couples have their Social Security cake and eat it, too, is for the lesser-earning spouse to retire at 62, then switch to the higher spousal benefit when their spouse retires at full retirement age. Social Security’s electronic booklet, ” What Every Woman Should Know,” explains how this works in greater detail.

There is another compelling reason that keeps people working between 62 and their full retirement age: health coverage.

“The primary deciding factor for people retiring, or not retiring, is not Social Security, but health care. Basically, the sign is, ‘Will work for health insurance,'” says Carney. “Many people who are 62 will gladly work for $10 an hour, say $20,000 a year, and health insurance. If you’re paying full-boat health insurance for a couple 62 to 65, it’s going to cost you somewhere between $9,000 and $12,000 a year, plus the deductibles and co-pays. If you can get $8,000 or $9,000 of that paid for by an employer, which is paid out of pretax dollars, that can increase by 50 percent or more what you’re actually making. The impact of that, so far, outweighs the trade-offs of taxation and compound earnings on the Social Security that it’s a no-brainer.”

Carney says all the calculators on the Internet can’t help you with the two biggest X factors: how long you’ll live and how you’ll fare in retirement.

“I think a lot of people make the decision based on what is rational for them. They may think, gee, if I quit work, I know I’m going to go downhill and I’ll die in two years; that is actually true for many people. So they keep working, and because they keep working, they live another 10 years. But some of those people make a decision that for them is the wrong decision if they really knew how everything would work out. You could really want to quit working, but you’re afraid to, so you waste those three years you could have had with family because you do have enough money.”

Bottom line: Before retiring, take stock of your health, your investment acumen and your assets. If you can’t think of a compelling reason to retire early, Social Security will make it worth your while to keep working.