Jonathan Peterson - Social Security For Dummies

Elisa was born in 1957 and wants to know how she would be affected by choosing different dates to retire. She goes to SSA’s Quick Calculator ( www.ssa.gov/OACT/quickcalc/index.html ) and plugs in the $160,000 she earned last year. If Elisa waits until her full retirement age of 66 years and 6 months, she’ll get about $2,881 per month. If she waits until 70 to collect benefits, she’ll get about $3,756 per month. And if she wants to start as soon as possible, at 62, she’ll get a more modest $2,044 per month.

Elisa knows that longevity runs in her family, so she wants to find out how much she’ll collect from Social Security if she lives to 90. To get the answer, she calculates the number of months she would receive benefits in three different cases: starting at 62 (336 months), starting at 66 and six months — her full retirement age — (280 months), and starting at 70 (240 months). Then she multiplies the number of months by the estimated benefit provided by the online tool.

If Elisa starts the benefit at 62 and lives to 90, she could end up with more than $686,784 over her lifetime, not even counting increases for inflation (336 months between 62 and 90, multiplied by the estimated benefit of $2,044 per month for benefits starting at 62). If she starts at 66 and 6 months, her lifetime collection would exceed $806,680. And if she starts the benefit at 70, she ends up with more than $901,440. The difference between starting benefits at 62 and at 70 comes to $214,656 for Elisa.

Figure 3-1 shows that your decision on when to begin retirement benefits makes a real difference in your monthly income. The numbers here are based on a retirement age of 66 and a monthly benefit of $1,000. They may differ based on your year of birth and other factors.

Source: Social Security Administration

FIGURE 3-1:The amount of your monthly benefit depends on the age you start receiving it.

Waiting to take retirement benefits beyond your full retirement age could prove especially important for Baby Boomers and, right behind them on the age ladder, members of Generation X. For people born in 1943 or later, the retirement benefit expands at a rate of 8 percent per year (or 2⁄3 of 1 percent per month) for each year you delay claiming (up to age 70) after reaching full retirement age. Check out Table 3-2for the numbers.

TABLE 3-2Increase for Delayed Retirement

Year of Birth*	Yearly Rate of Increase	Monthly Rate of Increase
1933–1934	5.5 percent	of 1 percent
1935–1936	6.0 percent	½ of 1 percent
1937–1938	6.5 percent	of 1 percent
1939–1940	7.0 percent	of 1 percent
1941–1942	7.5 percent	5⁄8 of 1 percent
1943 or later	8.0 percent	2⁄3 of 1 percent

* If you were born on January 1, refer to the previous year.

If you’re fortunate enough to have a nest egg and you want to retire, you can consider withdrawing more savings up front as a way to hold off starting your Social Security benefit. But does the strategy make sense? It well may, and there are some important things to keep in mind.

Social Security benefits go up about 7 percent for each year they are not claimed between age 62 and your full retirement age. Wait longer and the reward grows even more: Benefits increase 8 percent annually for each year they are not claimed between full retirement age and 70.

Are your financial resources adequate to support your lifestyle without Social Security, so you can delay claiming and lock in the income gains I just described? The issue can get complicated, and those interested may want to talk it over with a financial advisor. Among the considerations are the following:

The tax bite: A portion of your Social Security benefit may be subject to income tax (though at least 15 percent is tax free for everyone). Withdrawals from (non-Roth) Individual Retirement Accounts will surely have tax implications. But some research has shown that withdrawing more up front may reduce the tax bite later. Check your situation with an expert.

Family income: Is your spouse eligible for Social Security based on his or her work record? This increases your options. Just know that your total income may affect whether your Social Security benefits are subject to income tax, how much, and whether it makes sense to delay claiming. (See Chapter 13for a discussion of income tax rules and Social Security, including provisional income.)

Your investments: Consider reasonable rates of return, including your appetite for risk, in weighing the pros and cons of delaying a claim for Social Security. It’s extremely difficult to beat Social Security’s guaranteed returns.

Finally, a note of caution (and common sense): If your nest egg is modest, the strategy of withdrawing savings to delay Social Security may be unwise, because it’s important to have a cushion. Be realistic when calculating how much of a cushion you need.

When figuring out how much to reduce people’s benefits if they take the benefits early, the SSA considered average longevity. But you could live a lot longer than average — and that makes your decision on when to claim benefits that much more important.

No one can predict exactly how long you’ll live. You should also consider how old your parents lived to be and your personal health, including chronic conditions that may shorten your life span.

You can use an online calculator to assess your life expectancy. Go to www.livingto100.com and click on “Take the Calculator” or take the Longevity Test at www.bluezones.com , and you’ll be given an estimate. The Longevity Illustrator, developed by the American Academy of Actuaries and the Society of Actuaries, highlights how long you might live at different ages of retirement; visit www.longevityillustrator.org .

In the following sections, I cover two topics related to longevity and Social Security: completing a break-even analysis and handling the possibility of exceeding your projected life expectancy. Neither is as complicated as it sounds.

A break-even analysis compares what you get in your lifetime if you pick different dates to collect Social Security. It’s a way to estimate your total payoff from retiring at an earlier date (with reduced monthly payments) and retiring at a later date (with higher monthly payments). This approach gets some criticism, because it can lead to a costly decision if you end up living longer than expected. Factors such as your health and other financial resources also should be weighed in deciding when it makes the most sense to claim retirement benefits.