Taking Social Security Benefits Now vs. Later

Posted: Oct 01, 2008 12:01 AM
Taking Social Security Benefits Now vs. Later

Q: I'm 61 and will be eligible for Social Security benefits next year. From the numbers provided by the Social Security Administration, the difference between the age 62 payment and the full retirement (age 66) payment is about $595 per month. Would I not be wise to start withdrawal at 62 rather than wait until 66, given the benefits I will lose by delaying?

For instance, the total payments lost from age 62 to 66 years would be $1,691 a month times 48 months, or $81,168. It does not seem prudent to forgo that amount of money for only a $595-a-month increase. A lot could be done with the $81,000 in the more prime years of retirement, including investing.

If you have a solid pension, as I do, and several hundred thousand in a 401(k), is it smart to take the money early and enjoy it while you are in better health and then manage the Social Security money well over time? Have I missed something? -- A.L., by e-mail

A: That $81,168 seems like a lot of money, but unless you have an identifiable health problem, you'll collect more money by waiting until at least age 66. Here's the math. That $595-a-month increase is $7,140 a year. Divide that into $81,168 and you'll recoup the forgone benefits in 11.37 years. After that, you'll be ahead for each additional month you live.

Your life expectancy at 66 will be 16.1 more years. Factors like race, education and income could increase your expectancy by another three years or so. On your basic life expectancy alone, it's a very good bet that you'll live long enough to receive far more in increased benefits than you gave up. If you live to an expectancy of 16.1 years, for instance, you'll collect $114,954 -- all in constant purchasing power dollars. That's way more than the $81,168 you'll lose by deferral.

But it gets better! There's a consolation prize if you don't live long.

If you are married, your increased benefit will be passed on to your wife upon your death. As a result, deferring your benefits will increase the lifetime income and security of both you and your wife.

Your pension and savings will enable you to make this a very efficient use of money and benefits. Most people don't have the option of deferring benefits because they don't have the resources you have.

Q: I'm being told by the Social Security office that next year the $13,560 you mentioned in a recent article is jumping to $36,120. Can you explain? I am 65, and my birthday is Aug. 5, 1943. I plan to continue to work and will earn right around $36,120 up to my birthday. Also: I'm married. Does my wife's income affect any of this? -- K.A., by e-mail

A: There are two distinct issues here: (1) wages and early retirement and (2) the taxation of Social Security benefits. The increase to $36,000 is an early retirement issue. It only applies to the year in which you reach your full retirement age. For those born in 1943, the full retirement age for Social Security is 66. This will occur for you in August 2009. Before that date, you are subject to having to return some, or all, of your benefits if you earn over certain amounts.

For 2008 you would have to return $1 of Social Security benefits for every $2 you earned over $13,560. For 2009, the year you reach full retirement age, you would have to return $1 of benefits for every $3 earned over $36,120. (Both the $13,560 figure and the $36,120 figure will be increased for 2009 to reflect inflation.)

As a consequence, you shouldn't apply for Social Security benefits this year, but you won't have to return benefits if you start taking them next year.

Your wife's income may introduce the second issue. Her income would determine whether you have to pay income taxes on your Social Security benefits. The greater her income, the greater the odds that you will have to include up to 85 percent of your Social Security benefits in the taxable income on your joint income tax return. You can thank both of our worthless political parties for this cost and complexity.