How not to be one of them…

Deciding when you should start collecting Social Security retirement benefits can be difficult. The decision could alter how much you and your survivors collect by tens of thousands of dollars.

WHEN YOU ARE ELIGIBLE

Although anyone eligible for Social Security retirement benefits can start collecting a “reduced” amount as early as age 62, what the government calls “full” benefits are not available until the so-called “full” (or “normal”) retirement age, which ranges from 65 to 67 years old, depending on the year you were born. And even past that full retirement age, the amount of the checks you receive will keep rising by 8% for each additional year that you wait — until you reach age 70, after which waiting will not increase your benefits. (The rate is lower than 8% for those born before 1943.)

Example: If your full retirement age is 66, starting benefits at age 62 will permanently reduce your monthly checks by 25% from what you would get at age 66. That means if your full monthly benefit is $1,000, you will receive $750 per month if you start collecting at age 62. If you live to age 85, that translates to $21,000 less in total payments, even with the four extra years of checks (not including cost-of-living adjustments). So it may be better to wait. (Exception: If you start taking benefits before full retirement age and save or invest the money wisely rather than spend it, you might close the gap.) If you wait until age 70, rather than age 66, to start collecting, that $1,000 “full retirement” monthly check becomes a $1,320 monthly check. That’s an additional $9,600 you collect from the Social Security Administration if you live to age 85.

Of course, the best time to start taking benefits varies depending on your situation, including how much you have saved, how much you need to spend each year, how long you expect that you and/or your spouse will live and how much, if any, income you expect to earn each year from age 62 until you reach full retirement age.

To get an estimate of your life expectancy, go to money.msn.com/personal-finance/, and click on “Retirement,” then “Life Expectancy Calculator.”

Rule of thumb: The longer you expect to live, the more likely that delaying the start of Social Security benefits will pay off.

The Social Security Administration’s break-even age calculator can help you decide the best time to start collecting benefits, based on how long you expect to live. However, it does not take into account many other variables, including the possibility of earning interest or investment returns on any benefits you take early and don’t spend immediately. You can find the calculator at www.socialsecurity.gov/planners/ (click on “Break-Even” Age Calculator).

OTHER REASONS TO WAIT

In most cases, it is best to wait until full retirement age, and in some cases, until age 70, to start collecting Social Security retirement benefits…

  • You still are working or expect to return to work. Until you reach full retirement age, Social Security benefits are reduced by $1 for every $2 in earned income over a specified amount that increases with inflation. That amount is $13,560 in 2008. Important: This penalty applies only to earned income, not to investment income or rental income. When this penalty is figured into the equation, you almost certainly will be better off delaying benefits at least until full retirement age and receiving larger benefits later.
  • You are married and are eligible for higher benefits than your spouse, based on your earnings history. After you die, your spouse can claim survivor’s benefits equal to your full retirement benefit — but only if you wait until full retirement age to start collecting benefits. If you start collecting early, the reduced benefits carry over to your spouse after you die. However, if you postpone the start of benefits past full retirement age, your spouse’s benefits do not increase further.
  • Alternative strategy: If you are healthy and expect to live well into your 80s, consider filing for benefits at your full retirement age but then immediately suspending those benefits. Your spouse can’t file for spousal benefits until you file for your own benefits.

    To suspend your benefits, you must notify the Social Security Administration by phone or in writing.

    Under this scenario, your spouse can start collecting benefits as a dependent as soon as you file, based on your salary history. A person age 62 or older is entitled to receive benefits of up to 50% of his/her spouse’s benefits as a “dependent” of the spouse, as long as the person is not collecting benefits based on his own salary history.

    At the same time, by immediately suspending your benefits, you allow the size of your future checks to further increase for each year you wait to resume collecting benefits until you reach age 70.

    REASONS NOT TO WAIT

    There are certain scenarios under which you are better off starting to collect benefits before you reach full retirement age…

  • You have good reason to believe that you might not live beyond your mid-70s. This may apply if you are in poor health, have an unhealthy lifestyle and/or your parents, grandparents or other close relatives have a history of dying young.
  • Alternative: If you are forced to retire early because of poor health, consider applying for Social Security disability benefits (which are higher than early retirement benefits), rather than starting retirement benefits early.

    Note: Disability benefits run only until full retirement age, at which time full Social Security benefits begin.

  • You have dependent children. If you have a child younger than 18 years of age (19 if he/she is still in high school) and you receive Social Security benefits, this child will receive up to 50% of your benefit amount as a dependent in addition to the benefits you collect.
  • If this child is younger than 16, your spouse can qualify for additional benefits as a caregiver. (The total amount you and your family can receive in a year based on your work record alone, and not your spouse’s, is generally capped at 150% to 180% of your benefit amount. So if both your spouse and your child take dependent benefits based on your earnings record, each will receive less than the full 50% to which he would otherwise be entitled.)

    All of those extra checks often make it worthwhile to start benefits as soon as possible.

  • You need your benefits to pay your bills and/or to afford the retirement you want. The decision to begin collecting early may allow you to do things that you wouldn’t otherwise be able to afford.