Benefit Strategies

Your Payments Vary Depending on When You Claim Social Security
As you begin to consider the timing of your retirement from full-time work, the consideration of when to begin receiving Social Security benefits becomes a crucial factor.

You have three options if you have earned enough work credits to qualify for Social Security.

1. You can tap Social Security as early as age 62 if you’re willing to accept a permanently reduced payment.

2. You can wait until your designated full retirement age (see table A) to receive benefits.

3. If you don’t need the Social Security income to meet desired spending, you can postpone receipt. For each year you postpone receipt (up to age 70), your checks will increase by a percentage tied to your birth year (see table B).

Historically, retirees have opted to claim their benefits on the early side. If you absolutely need the income, or don’t expect to live very long after you beginning receiving benefits, those may be valid reasons to start as early as 62. The benefit-reduction penalty, which can exceed 20%, goes down the closer you get to your full retirement age.

If you can sustain your lifestyle without the Social Security income, you may be better off to wait for larger payments in the future.

If you live beyond a break even point that depends on the size of your benefit, waiting will pay off. Life expectancy research indicates that average people, of average health, will reach the breakeven point. Waiting to claim larger payments essentially allows you to buy more “insurance” against longevity.

Of course, many people simply can’t afford to postpone receiving Social Security benefits. Others prefer to take them as early as possible and invest them with the hope of making up the difference of the reduced benefit.

Life expectancy and lifestyle demands are critical to when to start
In most cases, if you delay receipt of Social Security dollars to earn larger monthly payments in the future, you only need to live beyond your early 80s to make up for the difference of starting early, even if you are able to invest your early benefits for growth rather than spending them each month.

In most cases, if you delay receipt of your Social Security income until your full retirement age or even age 70, you only need to live beyond your early 80s to make up for the difference of starting early.

Consider this example from the Social Security Administration Web site, www.ssa.gov.

The decade-plus difference between your full retirement age and breakeven point might seem like a long time but the probability that you’ll live to an advanced age may be better than you think.

According to the Social Security Period Life Table, as of its June 27, 2006 update, the life expectancy of a 66-year-old male in 2006 is another 15.45 years. Females have longer life expectancy. A 66-year-old female in 2006 is expected to live another 18.32 years. These are average life expectancies. If you are in good health and have longevity in your genes, the chance that you’ll live beyond average expectancy is quite good.

The Society of Actuaries provides another view of how long you might live. This table, derived to examine mortality expectations for pension plan participants - Social Security essentially being a massive pension plan for the working public - indicates the probability of living to other age milestones.

If you claim Social Security while still working
Once you reach your full retirement age, you can continue to earn as much as you are able without having your Social Security benefits reduced. If you want to claim benefits before full retirement age and continue to work, your benefits can be reduced if your earnings are beyond certain levels.

In 2007, if you earn more than $12,960 and are taking Social Security before the year in which you reach full retirement age, $1 in benefits will be deducted for each $2 you earn above $12,960. In the year that you reach your full retirement age, $1 in benefits will be deducted for each $3 you earn above $34,440 (2007) but only counting earnings before the month you reach your full retirement age.

Tax considerations
Despite not having your benefits reduced directly if you continue to work and claim benefits beyond your full retirement age, your Social Security payments may be subject to taxation if your modified adjusted gross income plus half of your Social Security benefit exceeds limits.

If Modified AGI + ¬Ω of Social Security income exceeds:

2006 numbers. See IRS Publication 915 for examples and details.

Consult a professional
A thorough understanding of your expenses and other sources of income in retirement can help with your decision about Social Security benefits. Feel free to contact us to provide valuable assistance in creating a retirement funding strategy that meets your needs.

Posted in The Wire |