Ask Bud - When to Start Social Security

  • Question
  • I retired early and now am approaching age 62 when I can start taking social security at $1,200 a month. Do you think I should start early or wait until I'm age 66 when I can get $1,600 a month?

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Answer from Bud

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    The answer depends on whether you think you will live longer than the "breakeven" age which is about 78 for a conservative investor and 82 for a more aggressive investor. The breakeven age is the age where it doesn't make any difference which alternative you chose once you reach that age. However, if you would die before the breakeven age, you would have been better off starting social security early. If you would die after the breakeven age you would be better off delaying social security.

    You can get an idea of the age that the average 62 year old will die by going to www.livingto100.com or www.ssa.gov, Publication 590. Remember that the average is right in the middle of the distribution of death ages. Half the people will die before the average and half will live longer. You don't want to live on 25% less social security if you are in the latter half.

    You don't say whether you are married, but delaying social security is generally even more important for a couple than a single person. That's because it's unlikely that they both will die before the breakeven age. The survivor will be much better off, particularly if dependent on the diseased spouse's social security. Further, the chances are the survivor will die at an age that is older than the single life-expectancy of either when they start social security

    Some people believe that the government will reduce social security benefits, so it's better to take the money early while the benefits are still large. However, the voting block of elderly is growing and is already so large that reducing benefits is an unlikely political alternative. It's more likely that social security taxes on the working population will increase because the vast majority will support a tax increase considering that they will be largely dependent on social security themselves since few have saved enough for retirement without it.

    That's the short answer, but if you are serious, there's a lot more to know.

    If you are married, there is a great benefit for delaying social security, especially if your spouse was a low-income worker or did not work at all. A 62 year old low-income spouse gets severely penalized when drawing on a higher income spouse's benefit. If low-income spouses delay social security to their full retirement age (65 to 67 depending on their birth year), they are entitled to 50% of the high-income spouses full retirement age benefit.

    What is often more important, and generally neglected by analysts, is the benefit the low-income spouse gets when the high-income spouse dies. That benefit is the larger of (1) 100% of whatever the high-income spouse was getting or (2) the benefit the low-income spouse would get based on the low-income spouse's earning record. If the high-income spouse took social security at 62, it's a major penalty to the surviving low-income spouse.

    If you are married and more gutsy, you can make a very good case for the high-income spouse to delay till age 70 and the low-income spouse to delay till the low-income spouse's full retirement age. That's what my father figured out even though he didn't have a modern computer or professional planner to help him. He lived till age 96 and may have taken more money from social security in constant dollar values than almost anyone.

    If the high-income spouse delays social security till age 70 and the low-income spouse till, say 66, two other lesser known facts about social security come into play. Depending on their relative ages, the high-income spouse may have to "file and suspend" at the high-income spouse's full retirement age or the low-income spouse may have to file once on the low-income spouse's earning record and then file again when the high-income spouse reaches the high-income spouse's full retirement age. You can work this out with your local Social Security Administration office, but you may have to be persistent because they don't have many cases like this.

    One final point: If there is any chance that you would have to go back to work sometime between age 62 and 66, you'll lose about $1 of social security for every $2 of wages for any wages exceeding $12,480 in 2006 dollar values. It's very important that you have some confidence in your ability to support yourself till death with the resources you have right after you retire. There are free planning programs on www.analyzenow.com that are much more comprehensive than you can generally find on the Web. There are also inexpensive programs on that site that are often used by professionals for more complex retirement decisions.

    So, if you have the resources to support you throughout retirement, my advice would be to delay starting social security to give you added protection for longevity. The same goes for your spouse if you are married. If you'd try to buy an inflation-adjusted annuity with the same benefit as the difference between the benefits at 62 and 66, you'd pay a lot more than the savings it will cost you to delay.

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H. K. Bud Hebeler is author of J.K. Lasser's Your Winning Retirement Plan, Getting Started in a Financially Secure Retirement, and retirement articles on www.analyzenow.com. He is often quoted in The Wall Street Journal and other financial publications.

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