Retirement Planning and Social Security Retirement Benefits
By Stan Johnson, CFP® www.compfinancial.com
One of the most importantand least-understood decisions we face as we approach retirement is when tostart taking Social Security retirement benefits. Should you start early andreceive benefits longer, or should you wait to get a larger monthly check?Unfortunately, many people make the wrong decision.
The Social SecurityAdministration just added a new Website for financial planners, but anyone cango to it at www.socialsecurity.gov/financialplanners. In the Retirement section of the site, there is a table that shows howyour monthly check will be reduced if you start benefits at age 62, as comparedto taking it at your Normal Retirement Age (NRA). The NRA has been going up inrecent years, and for those who were born from 1943 through 1954, it will be66. Anyone in this age group will reduce his or her monthly Social Securitycheck by 25 percent if they start receiving their benefits four years early, at62.
The Website alsoprovides a link to a "Breakeven Points" calculator, where you can calculate atwhat age the accumulated value of the benefits taken at 62 and at your NRA areequal. Presumably, one could base the decision on whether you think you willlive beyond the breakeven age. An example on the Website shows that for someonewho was born in February 1942, the breakeven age is 77 years 10 months. So, aperson who thought he probably would not live to see his 78th birthday mightdecide to take the benefit early.
The Website listsseveral factors that should be considered in making the decision (in the link "Other things to consider"), but it falls well short of even mentioning several other factors.Failing to understand these additional factors is what leads people astray:
1) Thereare really two decisions to make. The first is when to start your benefits, andthe second is when to quit working. If you start your benefit early butcontinue to earn income, your benefits will be reduced if you earn over$12,960/year until you reach your NRA. Your benefits are not affected once youreach your NRA, no matter how much you make or whether you have taken an earlybenefit. If you delay starting benefits several years after you quit earningany income, your income might be squeezed. However, there are ways to managethe situation.
2) Survivingspouses are entitled to the benefit of the deceased worker or to their ownbenefit, whichever is greater. However, if the deceased spouse took a reducedbenefit and the survivor's benefit is lower than the deceased's benefit, thesurvivor will live with a reduced benefit also. (For more information, read anarticle posted at www.CompFinancial.com on the Documents page thatdiscusses this and other issues concerning married vs. single workers.)
3) Onceyou have taken your first benefit check, it's hard to change your mind. Yourdecision isn't exactly irrevocable, but you have to file form SSA-521, "Requestfor Withdrawal of Application," with the Social Security Administration and payback the funds you have received. If you can't afford to pay it back, then youand your survivors are stuck with the reduced benefits for life.
4) Last,and most important, what are the real risks? Most people need a nest egg toproduce income during retirement to supplement their Social Security check. Thebiggest risk all of us face is outliving our nest egg. If you live well beyondthe breakeven age, having a larger benefit will decrease the odds you outliveyour nest egg. And remember that your benefit will be increased by the Cost ofLiving adjustment every year, so the gap will get wider as you age.
In 2003, 59 percent ofwomen and 53 percent of men opted to claim their retirement benefits at age 62,and most of the remaining retirees opted to take a reduced benefit before theirNRA. Yet, most of those people will live until they're over 80, and almostone-third will live into their 90's. Most of them would have benefited bywaiting to take their benefit at their NRA or even later. (It's not oftenrealized that your benefit can be increased by 8 percent for every year youdelay starting your benefits beyond your NRA.)
What should you do? Hirea financial planner with the right tools and experience to provide you with adetailed analysis and a recommendation.