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What's the Best Age to Claim Benefits?

How your benefits are affected if you continue to work

En español | Q. I am 60 years old and trying to decide when to take my Social Security benefits. What are my options? If I continue to work for a few years, how will that affect my Social Security payments?

A. Basically, you have three options: early retirement, full retirement at age 66 or late retirement. If you take early retirement, you can collect your Social Security benefits as early as age 62. With full retirement, you wait until age 66. Late retirement means deferring your benefits until as late as age 70.

Each of these options comes with a different calculation for how much will be in your monthly payment. You can retire at any time between 62 and 70, with your benefits prorated to reflect your age.

If you choose early retirement, your monthly benefit will be permanently reduced. Why? Because you will be getting more checks for a longer period of time than a person who delays benefits until age 66 or age 70.

Let's say, for example, your expected payment is $1,000 a month at your normal retirement age of 66. If you retired at 62, you would get a reduced benefit of $750. But if you waited until 70, you would get $1,320 — about a 32 percent increase.

The "Benefit Based on Age" chart above illustrates how your monthly payments are tied to the age at which you begin your benefits.

Before you make your decision, there are two other monetary factors worth thinking about.

The Social Security earnings limit

If you plan to take your benefits and continue to work, be aware that in 2011 you will be allowed to earn only up to $14,160 before you run into the earnings limitation. For every $2 you earn above $14,160, Social Security will withhold $1 in benefits.

Earnings limitations go away in the month you reach age 66, and, indeed, the money withheld is eventually returned to you. When you reach your full retirement age, Social Security will review your earnings record, and will increase your benefit to account for all months where a full monthly benefit was not paid because of your work.

But, in the short term, if you earn much more than $14,160 a year, you might not see much of your Social Security benefits until you're 66. In that case, it might be prudent to wait until age 66 before taking benefits at all.

Taxes on Social Security benefits

Social Security benefits are subject to federal income taxes and thus, the earlier you take your benefits, the sooner you may begin to pay higher income taxes.

Taxation of benefits is tied to "combined income," which the IRS defines as the sum of your adjusted gross income plus nontaxable interest plus half of your Social Security benefits.

Individuals with combined incomes of $25,000 to $34,000 and couples with combined incomes of $32,000 to $44,000 may have to pay taxes on 50 percent of their Social Security benefits.

If an individual's combined income rises above $34,000, or a couple's goes above $44,000, up to 85 percent of their Social Security benefits may be subject to income tax.

The Social Security website is a valuable source for information on retirement benefits. For additional information on taxes, call the Internal Revenue Service at 1-800-829-3676. Ask for Publication 554, "Tax Guide for Seniors," and Publication 915 "Social Security and Equivalent Railroad Retirement Benefits."

Stan Hinden is a longtime financial writer and author of How to Retire Happy: The 12 Most Important Decisions You Must Make Before You Retire.

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