Mysteries of Social Security Retirement Benefits: Part Deux--When

In our preceding blog, we gave you a thumbnail sketch of how Social Security determines your retirement benefits. Now, we discuss when you might want to start collecting benefits.

The earliest you can start collecting retirement benefits is age 62. The amount will be less than what you'd get if you waited until your "full" Social Security retirement age. Your "full" Social Security retirement age depends on when you were born. If you were born any time from 1943 to 1954, your full retirement age is 66 (it's lower if you were born before 1943, but in that case you're probably already collecting benefits or about to start collecting them). If you were born in: (a) 1955, full retirement age is 66 and 2 months; (b) 1956, full retirement age is 66 and 4 months; (c) 1957, full retirement age is 66 and 6 months; (d) 1958, full retirement age is 66 and 8 months; (e) 1959, full retirement age is 66 and 10 months; and (f) 1960 or later, full retirement age is 67.

The next question is how much less do you get if you start collecting benefits before your full retirement age. While the Social Security website (www.ssa.gov) isn't precise, it does give a couple of examples. If your full retirement age is 66, the reduction in benefits: (a) at age 62 is about 25%; (b) at age 63 is about 20%; (c) at age 64 is about 13.3%; and (d) at age 65 is about 6.7%.

If your full retirement age is 67, the reduction in benefits: (a) at age 62 is about 30%; (b) at age 63 is about 25%; (c) at age 64 is about 20%; (d) at age 65 is about 13.3%; and (e) at age 66 is about 6.7%. If your full retirement age is between 66 and 67, the reductions apparently are somewhere between the amounts for ages 66 and 67.

It's important to understand that these reductions are permanent. If you start collecting benefits at age 62, they will always be about 25-30% less than the benefits you would have gotten if you had waited until your full retirement age. The fact that you are getting benefits sooner, and may be able to stop working at an earlier age, may make it worth your while to forego the higher benefits available at a later age. Just be sure you understand the cost.

If you delay taking benefits after your full retirement age, your benefits will increase even more. That's especially true if you continue to work. The amount of the increase will depend on whether or not you work, how long you work and how much you earn. For people born in 1943 or later, a boost of 8% per year is provided for each year of delay (and your benefits may be further increased if you keep working). So you might be able to leverage your benefits upwards as much as 24% or more over your full retirement age benefits if you wait until age 70. But start collecting them when you hit the big 7-0, because they don't increase with further delay.

So, when should you start collecting retirement benefits? That depends on your personal situation. If your health is good and you think you have a long life expectancy, delay benefits as much as possible. That way, you'll have better protection for the last years of your life, when your savings may run low. The benefits you get by waiting until 70 can be 50% or more than the amount you'd get starting at age 62, so we're talking about some serious pocket change. As we discuss in Uncle Leo's Den, boosting your Social Security benefits is a valuable way to pump up your retirement resources.

But be careful if you've stopped working. Without a job, how would you live for the years before you started to take Social Security? If you have a pension, you may be able to get by with that. But if you'd have to burn off a lot of your savings in order to delay benefits, you may be better off starting benefits earlier and conserving your savings. Retired people can't replace spent savings, so if your savings are modest, keep them warm and dry for big expenses like medical care.

On the other hand, if your health is poor, consider taking benefits at age 62, especially if you are unable to work. That way, you'd get something back for all the Social Security taxes you paid.

The answer becomes more complicated if you are married. Your spouse is entitled to Social Security benefits based on your record, and can collect up to half the amount of your benefits (but only when you start to collect). If the two of you are short of cash, and the total amount of your combined benefits would provide badly needed cash flow, it could make sense to start collecting earlier. However, be cautious about jumping the gun. The spousal benefit shrinks if your spouse begins collecting it before his or her full retirement age, similar to the shrinkage in your benefits if you begin collecting them before your full retirement age. Make sure the sacrifice is worthwhile.

While there may be many nuances to the question of when you begin collecting Social Security retirement benefits, our discussion should give you a general idea of what it's all about. Granted, thinking about this stuff can become mind-numbing after a while. But you could receive hundreds of thousands of dollars from Social Security during your retirement, and that's worth a few headaches.

Our next blog will continue to explore the mysteries of Social Security retirement benefits.

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