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Financially Speaking

Social Security, Longevity Insurance

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

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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