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Social Security, Longevity Insurance

Are you better off with early-but-lower payments or later-but-higher payments?

En español | Worried about the future of your Social Security benefits? Relax. If you're retired or close to it, little or nothing will change. There might be adjustments for people under 55, but passing new legislation will take a while.

I'd bet that every current AARP member, including those who have just reached 50, will enjoy about the same Social Security system we see today.

Benefits for the next generation might slim down a bit, but that's not the end of the world. Congress trimmed benefits for the boomer generation in 1983, when the full retirement age was raised, in several steps, to 67 from 65. The boomers didn't kick.

So how do you tease the most benefits out of Social Security? I'll do a quick pass at the rules and then suggest some ideas.

The earlier you claim Social Security, the lower your monthly check. For example, if you were born between 1943 and 1954 and you sign up for benefits at 62, you'll get 25 percent less than if you waited until 66, which is your full retirement age.

Your benefit rises by about 8 percent for each year of delay, until age 70 when it tops out. At that point, your checks will be at least 76 percent higher than if you had retired at 62. While waiting, you also accrue annual inflation adjustments, if the consumer price index goes up, so your actual gain could be higher than 8 percent a year.

If you were born after 1954, the full retirement age rises rapidly to 67. Retiring at 62 will slice 30 percent from your full retirement benefit.

Whether you'll live long enough to make a delay in benefits worth it is something you don't know. Are you better off with early-but-lower payments or later-but-higher payments?

In general, taking benefits early works for people who get high returns from their investments, says Michael Kitces, director of research for the Pinnacle Advisory Group. They can spend their Social Security checks while leaving their savings alone to grow.

On the other hand, taking benefits later will be the right choice if inflation jumps in future years. Your cost-of-living increases will be figured on top of the higher benefits you earn by delaying the start of your checks. That's much more than you can expect from stocks and bonds. A delay also benefits those who live beyond their normal life expectancy.

Some people have no choice. They have to sign up as soon as they reach 62 because there's no other money.

If you do have a choice, however, here's what to consider:

  • If you're in poor health, take your benefits at 62 if you're single or if you're married and your spouse has a substantial benefit of his or her own. But if your spouse is healthy and will depend on your benefits, put off collecting for as long as you can. That maximizes the income you'll leave behind.
  • If you're in good health, put off taking Social Security for as long as you can. The higher the benefit you can accumulate, the safer you'll be if you live past your life expectancy. If you die and your spouse gets benefits on your account, he or she will get a higher income, too.
  • If you'll continue to work past 62: Take no benefits until your paycheck stops or you reach your full retirement age. Prior to that, any substantial earnings will reduce your Social Security check.
  • If you have a high enough taxable income to owe taxes on your Social Security checks: Consider delaying your benefit. A substantial income from other sources --pensions, annuities, dividends, interest, 401(k)s or traditional individual retirement accounts -- kicks you up to a level where you'll owe taxes on either 50 percent or 85 percent of your Social Security. If that other income goes down, you might be able to receive Social Security tax-free. The smart strategy, for people in these brackets, is to spend some or most of your 401(k) or IRA first, says Boston University economist Larry Kotlikoff, creator of the financial planning tool E$Planner, and take your Social Security later. (If you have a Roth 401(k) or Roth IRA, you can take that money at any time with no tax effect.)
  • If you and your spouse are both entitled to Social Security, plan to use your own benefit plus the spousal benefit you can get from your husband's (or wife's) account. Here are two ways of capturing the money:

  1. The husband works beyond his normal retirement age. At 66, he applies for benefits but then suspends his claim and tells Social Security that he doesn't want to collect them yet. When the wife reaches 66 (her full retirement age), she applies for a spousal benefit, which is 50 percent of what her husband is entitled to. The husband's benefit continues to rise until age 70; the wife's spousal benefit rises with it. At 70, he starts collecting. The wife, at 70, applies for her own retirement benefit, if it's higher than what she gets as a spouse. In reverse, the wife might work until 70 and the husband might apply for spousal benefits at 66.
  2. The wife might retire early, accepting discounted payments from her own Social Security account. Her husband could keep working, letting his Social Security benefits grow. When he retires, she can step up to a spousal benefit, assuming it's higher than her own. (Note that she won't get the maximum. She'll never escape the discount she took by retiring earlier than 66.) In reverse, the husband might retire early and then step up to spousal benefits on his wife's account. Unmarried, divorced spouses can get spousal benefits even if the ex has not retired, as long as the marriage lasted at least 10 years and the divorce occurred at least two years ago.

Social Security is your longevity insurance. As long as your health is good, the odds favor waiting until 66 and beyond before signing up.

Jane Bryant Quinn is a personal finance expert and author of Making the Most of Your Money NOW. Her column, Financially Speaking, appears monthly in the Bulletin and online.

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