Friday, December 12, 2008

Social Security; When to Collect

A major decision facing individuals turning age 62 is; should they take Social Security benefits early or delay until full retirement age or even later. You will get different answers among financial professionals depending on who you talk to. If a financial service person goes right into; take Social Security and invest the money into XYZ, you should be suspicious. They are more than likely thinking of a sale, than what is really best for you. Because your decision to take Social Security early depends on your life expectancy and future returns of investments, an absolute answer to the question is not possible. What is possible is to inform you what to consider when making the decision.

According to an example on a 62 year old would receive $1018 a month. At age 67, which would be full retirement age, the monthly benefit is 1476, and at age 70 the benefit is $1840 monthly.

Let’s say you collect your benefit at age 62 and invest 100% of the after tax amount into an investment that earns 6% per year for 5 years. Let us assume you are married, file a joint tax return, and have a combined income of $42,000. About $76 of each check will go toward income taxes. That leaves $942 to invest each month. Invested for five years at 6% you would have $65,744. If you invest in an immediate annuity for you and your spouse, you would get about $390 (Joint life annuity) a month according to This is short of the increase in monthly benefits of $458 from Social Security for delaying payments until age 67. The increase in your SS benefit comes with a cost of living adjustment (COLA) and more favorable tax treatment. A single life annuity would produce about $465 monthly. This may be more than the increase in your SS benefit, but with  one or two COLA adjustments you should have a greater benefit from SS in a few years.

The other way to look at it is; how long it takes to accumulate $65,744 (cost of delaying benefit) if you invested the $458 a month (the increase in benefit). You would break even in 9 years and 1 month using a 6% rate of return. Which means if you live past the age of 76, it was worth the delay in benefits. Most articles now state the probability of a 67 year old living to age 76, this misses the point. You need to make your decision at age 62. The probability of a 62 year old male living to age 76 is 75%, and a female 80% according to The Vanguard Group’s life expectancy calculator.

Some other things to consider are:

If you still plan on working before your normal retirement age, $1 in benefits will be deducted for each $2 you earn above the annual limit. In 2008 the limit is $13,560.

Your health, you may want to take SS benefits as soon as you can, for obvious reasons. If you take the early benefits, remember it may impact your spouses’ benefits.

Whose record will your spouse collect under? If your spouse will be collecting SS under your record, then an increase in benefits to you will mean an increase in benefits to your spouse if he/she outlives you.

Can you afford not to take it? Sometimes retirement is not by choice, and people need to figure out how to make ends meet. Collecting SS early may be a necessity.

Individuals considering taking early SS benefits should think about other sources of income to sustain themselves for as long as possible. Social Security is the one benefit backed by the taxing power of the federal government; which makes it one of the most secure lifetime benefits in the world today. As noted above it also has a COLA and favorable tax treatment. There is not another product available today by financial service companies that can match the value of your SS benefits.


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