September 21, 2008 - I'm approaching retirement age, but the rules about Social Security are confusing. When should I begin taking benefits?

When analyzing the optimum date to start receiving Social Security retirement benefits, several factors should be taken into account. Among them are the following:

What is the `full retirement age'? Persons who otherwise qualify can receive nonreduced benefits if they have reached their full retirement age ("FRA"). For persons born from 1943 to 1954, the FRA is 66. For persons born after 1954, and up to 1960, the FRA increases by two months each year. For persons born in 1960 or later, the FRA is 67.

What is the penalty for retiring before reaching the FRA? If a person starts receiving SS retirement benefits before his or her FRA, there is a permanent reduction in benefits received. The earliest age a person can start to receive SS retirement benefits is 62. There is a 25% reduction in benefits if someone with an FRA of 66 starts receiving benefits at age 62.

Can SS retirement benefits be received while still working? A person does not have to actually stop working and retire to start receiving SS retirement benefits. In fact, once a person reaches the FRA, he or she can receive full retirement benefits regardless of earnings from other sources. However, for persons receiving benefits before the FRA, there is the potential for receiving a reduced benefit. For every $2 that an individual earns in excess of $13,560 in 2008, there will be a deduction of $1 from his or her Social Security benefits. Based on these earnings rules, if a person has earnings in 2008 equal to $13,560 plus twice his or her SS retirement benefits, the effective receipt from SS benefits would equal zero.

What about the health status of the recipient? The uniform life expectancy table shows life expectancy at attained age 62 to be 85.5 years and at attained age 66 to be 86.2 years. Someone in poor health, of course, may be less likely to live to the expected age than a healthier person. No one knows the future, but the more realistic the assumptions about a recipient's life expectancy projections are, the better will be the determination of the optimum start-date for the SS retirement benefits.

So, should I start benefits at age 62 or wait to FRA?. This question may be answered with a simple analysis in some cases. A start-date of age 62 versus 66 would not be an issue if the recipient has earnings so high that SS retirement benefits, even if applied for, would not be received because of the earnings penalty discussed above. In this case, the recipient has no choice but to wait until age 66. On the other hand, the opposite would be true if the recipient has earnings so low that SS retirement benefits are needed at age 62 to meet necessary living expenses. Between these two extremities, the choice of age 62 versus age 66 is not so clear-cut.

One approach to help with this decision is to determine a "break-even age". This is the age at which the total cumulative benefits received by waiting to FRA equal the total cumulative benefits received with a start date at 62. This analysis should include two variables: One variable is the annual cost-of-living adjustment ("COLA") increase in SS benefits that will be paid each year. In 2007, the COLA was 3.3%, and for 2008 the COLA is 2.3%. A second variable is the after-tax rate of return on investments that a SS recipient can earn on SS retirement benefits received.

For example, if you assume an annual COLA of 3% and an after-tax investment rate of 5%, and FRA of age 66, the break- even age is 80 years, 4 months. In other words, if you expect to live beyond that age you should wait to age 66 to start benefits. On the other hand, if your conclusion is you probably won't live that long you should begin benefits at age 62. Obviously, changing the variables will yield a different break-even age and a complete illustration of those possible results is too much for this discussion. Also, it is important to consider all the personal and emotional factors that may be an important part of any decision, financial or otherwise.

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