When should you take Social Security benefits?

One of the most difficult questions facing retirees or those nearing retirement is when to start taking Social Security benefits. The question is important because you can't change your mind once you start receiving benefits, and a wrong decision can cost thousands of retirement dollars.

Of those currently receiving Social Security retirement benefits, almost 70 percent began taking them before normal retirement age, often as early as 62, which is the earliest you can begin collecting. However, taking early benefits reduces the size of the monthly payments that you receive.

Payments to those who retired at age 62 are 20 percent smaller than if they had waited until age 65. For people born in 1960 and after, whose normal retirement age will be 67, starting payments at age 62 will reduce payments by 30 percent. If you wait beyond your normal retirement age to start collecting, the delayed benefits grow larger—roughly up to 8 percent a year until age 70 for someone whose normal retirement age is 67.

All of this begs the question: Should you start collecting benefits as early as age 62, wait until normal retirement age or delay until age 70? Here are several factors to think about, offered by Dennis Filangeri, a certified financial planner based in San Diego:

Social Security calculates monthly payments so that if you start early, the smaller payments collected over a longer time will total the same amount as if you had started at normal retirement age or as late as age 70. However, all these payments are based on your normal life expectancy. If you live beyond that life expectancy, then delaying benefits will result not only in higher monthly payments, but a higher lifetime total.

Social Security provides an example: Say your normal retirement age is 67 and you are entitled to receive $1,000 a month starting at that age. You live to age 85, four years beyond your normal life expectancy. If you retire at age 62, total benefits will be $193,200 (these totals are unadjusted for inflation). If you retire at 67, they'll total $216,000. If you wait until age 70 to start, benefits will total $223,200.

Thus, if you are in good health and have a family history of longevity, delaying benefits may provide more money in the long run. If you don't expect to reach or exceed life expectancy, then it may make sense to start as soon as allowed.

You may need to start taking early benefits. People retire early for a variety of reasons, and not always because they want to. You may need the benefits to pay for basic living or perhaps to cover health insurance premiums until you become eligible for Medicare (still age 65).

You may decide to reduce your working hours in your early 60s and start taking benefits early in order to supplement the lost income. However, keep in mind that people collecting Social Security benefits before age 65 lose $1 in benefits for every $2 earned exceeding $10,680 (in 2001). Those 65 and older no longer lose benefits, regardless of how much they earn.

Some experts argue that delaying payments also can make sense for married couples in which there is a younger spouse who has not earned much. That's because the younger spouse will continue to collect the benefits of the deceased spouse.

Retirees who have sufficient other sources of income may feel comfortable delaying benefits. However, some experts point out that collecting benefits as early as possible might enable some retirees to draw less from their retirement accounts and IRAs. This enables that money to continue to grow tax deferred, leaving more for later retirement years or for heirs.

Many people take Social Security as soon as they can because they prefer to have a "bird in hand." They worry about future Social Security reform diminishing their payout or requiring higher taxes.

Clearly, the decision is a complex one you will want to discuss with a certified financial planner. For example, the planner can help you calculate the "break-even" point: the number of years it will take you to recoup the money you didn't receive by retiring early.

Zall, Bureaucratus columnist and a retired federal employee, is a freelance writer based in Silver Spring, Md. He specializes in taxes, investing, business and government workplace issues. He is a certified internal auditor and a registered investment adviser. He can be reached at miltzall@starpower.net.