When to take Social Security benefits
September 25, 2008
The age at which one first becomes eligible to receive Social Security retirement benefits is 62. However, you can elect to defer receiving benefits to a later date, up until your full retirement age. If you were born between 1943 and 1954, your full retirement age is 66. If you were born between 1955 and 1960, your full retirement age is 66 plus two months for every year after 1954 you were born. So, for example, if you were born in 1959, your full retirement age would be 66 years, 10 months. If you were born after 1960, your full retirement age is 67.
The longer you wait to receive benefits the greater the monthly benefit you receive will be. If you elect to start receiving benefits before your full retirement age, your benefits are permanently reduced by 5/9 of 1% for each of the first 36 months that benefits commence before full retirement age plus 5/12 of 1% for each month over 36 months. That is a bit confusing, so an example is in order. Assuming again that you were born in 1959, your full retirement age is 66 years, 10 months. If you elect to take retirement benefits at age 63, you are retiring 46 months early. You get a reduction in benefits of 5/9 of 1% for each of the first 36 months plus 5/12 of 1% for each of the last 10 months. 5/9(.01)(36) + 5/12(.01)(10) = 24.1664%.
The trick is to figure out what your individual break-even age will be, that is, the age to which you will have to live to make waiting for the greater benefits pay off. If you do reach that break-even age, the later retirement date will be to your advantage. There are several factors that influence what the break-even age will be. First is the cost of living adjustment, or COLA, which is an increase applied to Social Security benefits each year based on economic conditions. In 2007 the COLA was 3.3%, in 2008 it is 2.3%. COLAs going back to 1975 are available on the Social Security Administration’s website at www.socialsecurity.gov/cola/automatic-cola.htm . The highest COLA during that period was 14.3% in 1980, while the lowest was 1.3% in 1999. Of course, it is impossible to predict with certainty what the COLAs will be in the future.
Another factor that influences the decision when to start receiving benefits is the rate of return you can get on the benefits paid to you. Obviously, you will need to consult with your financial advisor to determine what your rate of return on your particular investments is likely to be. As a general rule, the lower the expected COLAs and the lower the expected rate of return, the lower the break-even age. For example, if COLAs average 3% and you earn 5% on your Social Security benefits, your break-even age will be lower than if COLAs average 5% and your rate of return is 7%.
Of course, this entire discussion assumes that the Social Security retirement benefits are not needed for daily living. If they are needed, the time to elect to receive them is now. In addition, the discussion assumes that you will actually live to your break-even date, which is, of course, unknowable. To get an idea of how long you are likely to live, or just for fun, you might want to check out the calculator at www.livingto100.com.
Kirsten Howe practices estate planning law in Walnut Creek. Send your estate planning questions to Kirsten by e-mail.
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