Timing maximizes Social Security

Deseret News (Salt Lake City), Jan 13, 2008 by Mary Beth Franklin Kiplinger's Personal Finance

The oldest baby boomer, Kathleen Casey-Kirschling, turned 62 a tick after midnight on Jan. 1, 2008, and she has already applied for Social Security benefits.

Even if you'll soon be eligible to apply, it might make sense to wait. If you were born between 1943 and 1954, you cannot receive full benefits until age 66. You may start collecting Social Security as early as 62, but your monthly check will be reduced by 25 percent for the rest of your life.

Deciding when to take Social Security benefits isn't always a slam-dunk.

"There's a tendency to grab the bird in the hand," says Conrad Ciccotello, professor of financial planning at Georgia State University. "But with longer life expectancies, the decision to take benefits early is less appropriate."

There are only two scenarios in which the decision is clear-cut: if you are ill or if you plan to continue working, says Ciccotello.

In 2008, if you continue to work while collecting Social Security and you are younger than 66, you can earn up to $13,560 without jeopardizing your benefits. After that, you lose $1 for every $2 you earn over the limit. Once you turn 66, you can earn any amount without reducing your benefits.

Over an average lifetime, you will collect about the same amount whether you take smaller benefits early or larger benefits later. But if you live beyond your so-called break-even age (which you can calculate at www.ssa.gov), you'd collect more if you waited.

One problem with that calculation, says Ciccotello, is that it doesn't take investment earnings into account. Claiming benefits early might allow you to keep more of your savings invested longer. In that case, the higher your rate of return, the more sense it makes to let your savings grow and take benefits early.

Single workers, particularly those with little savings, should consider working as long as possible to maximize their Social Security benefits. For every year you delay collecting benefits beyond 66, you earn an 8 percent credit, up to 132 percent of your normal retirement benefit at age 70.

Married couples face the most challenging timing decision. The lower-earning spouse -- usually the wife -- is entitled to three types of benefits: one based on her own earnings, a spousal benefit equal to half of her husband's benefit if it exceeds her own, and a survivor benefit equal to 100 percent of her husband's benefit after he dies.

Although her retirement benefit would be permanently reduced if she collected early, she would still be entitled to her full survivor benefit as long as she was at least 66 when she collected it. To maximize survivor income, the husband should delay benefits as long as possible.

Mary Beth Franklin is a senior editor at Kiplinger's Personal Finance magazine. Send your questions and comments to moneypower@kiplinger.com.