Sooner Is Better - Brief Article

Kiplinger's Personal Finance Magazine, May, 2000 by Mary Beth Franklin

RETIREMENT | You'll soon be able to cash in on SOCIAL SECURITY even if you stay on the job.

WITH CONGRESS on the verge of offering full social security benefits at age 65--even if you keep working and pull down a fat salary--it's time to rethink when you should put in for benefits. Under present law, workers ages 65 to 69 lose $1 of benefits for every $3 they earn over $17,000 a year. But the House of Representatives has passed legislation repealing the infamous earnings test, and the Senate is likely to follow suit. The repeal would be retroactive to the first of the year, so if you turn 65 this year--or you're between 65 and 70 and still working--listen up. (Sorry, workers ages 62 to 64 will continue to be squeezed by a tougher earnings test that reduces benefits by $1 for every $2 of earnings over $10,080 in 2000.)

Although the demise of the earnings test means it probably makes sense for you to claim benefits at age 65 even if you continue working, that's not always the case. That's because for every month you delay until age 70, you earn a delayed-retirement credit that boosts your benefits once you put in for them. The answer to the big question--whether bigger checks will pay off--depends on whether you outlive your projected life expectancy.

Say you turn 65 this year and are entitled to the maximum social security benefit of $1,433 a month. For each month you delay, you earn a 0.5% bonus, up to 6% a year and a maximum credit of 30% at age 70. A 30% hike would put your monthly benefit at $1,863. Under current law, those who continue to work and lose benefits to the earnings test automatically get the delayed-retirement credit. The demise of the test means that you'll have to make a choice.

Patience will probably not pay off, according to Bob Treanor, a benefits consultant with William M. Mercer, in Louisville, Ky. "In this example, someone who takes retirement benefits at 65 would be ahead of the game by about $86,000," he says. That's the amount of benefits he or she would collect between ages 65 and 70.

It would take more than 16 years for the higher benefits available at age 70 to overcome that head start--even longer if you bank the benefits during that five-year period rather than spend them. And for a 65-year-old man today, the odds of surviving to 86 are not good (it's about six years longer than his projected life expectancy). For a woman, the break-even point is about two years past her projected lifespan.

Other factors, however, could influence your decision, notes Treanor. For example, if you have a younger spouse who will collect social security benefits based on your earnings record, it may be worth waiting for the bigger benefit. While the credits won't increase your spouse's benefit while you're alive, she or he will be entitled to 100% of your benefit--including delayed credit--as your survivor.

Postponing benefits will be a little more attractive in the future as the delayed-retirement credit gradually increases to 8% a year for those born in 1943 or after. But these later retirees will have fewer years to accumulate the credit as the full retirement age increases from 65 to 67.