October 2007
Social Security: When to start collecting
You can take benefits as early as age 62, but odds are you'll get more money overall if you can wait.
Illustration by Bob EcksteinIt's the one financial question virtually all Americans will eventually face: When should you begin to collect your Social
Security benefits?
If you are eligible for benefits, you can start collecting as soon as you're 62. But there's a trade-off. At 62 you'll receive a benefit that's roughly 30 percent less than what you'd get if you waited until your "full" retirement age. For anyone born between 1943 and 1954, that's 66. What's more, once you start receiving a reduced benefit, it stays reduced, even after you reach full retirement age.
POSTPONING PAYS
If you put off collecting until after full retirement age, you'll be rewarded with a benefit that could be about 30 percent higher than the full one. Once you reach age 70, your benefit won't get any higher, so you might as well start collecting.
The differences in dollar terms can be considerable. For example, a worker eligible for a monthly benefit of $1,610 at age 62 would receive $2,190 a month if he or she waited until age 66 to collect, and $2,945 a month at age 70. Those amounts would be subject to cost-of-living increases in the years ahead.
About half of all workers in the U.S. these days start collecting benefits at age 62, and 70 percent do it before their full retirement age. Are they too eager to cash in? Maybe so--unless, of course, they are forced by economic circumstances to take early retirement. As an analysis by the Consumer Reports Money Lab shows (see Waiting to collect), if you have enough income to support yourself without a Social Security check, the decision about when to start collecting is largely a bet on how long you're likely to live. And given that average life expectancy continues to rise, the odds in favor of delaying are becoming stronger.
According to the latest data from the National Center for Health Statistics, men who turned 65 in 2004 had a life expectancy of 17.1 more years, meaning they were likely to reach age 82. Women at 65 had a life expectancy of 20 more years, taking them to age 85. What's more, your life expectancy increases as you age. So, men who were 75 in 2004 had a life expectancy of 10.7 more years (for a total of 85.7 years), while women had 12.8 more years (for a total of 87.8). Those are simply averages, of course, and many people will live, and collect their benefits, even longer.
You can guess at your likely life expectancy by considering how long your relatives lived and assessing how healthy you are. Online calculators, such as the one at www.choosetosave.org, can also help.
OTHER CONSIDERATIONS
If you plan to keep working, that's another reason to delay. From 62 up to the year you reach full retirement age, you'll lose $1 in Social Security benefits for every $2 of your earnings over a certain annual amount, currently $12,960. In the year you hit full retirement age, a new formula kicks in: Earn more than $34,440 a year and you forfeit $1 in benefits for every $3 above that threshold. But starting with the month you reach full retirement age, you'll no longer be penalized for working.
A final, and unpredictable, factor to consider is the health of the Social Security system. With growing numbers of retirees, the Social Security Trust Fund will be paying out more in benefits by 2017 than it takes in, according to the 2007 trustees' report. By 2041, its reserves are projected to run out. At that point Congress will face some tough options, one of which could be reducing retirees' benefits.
So it's possible that you won't get as much as you expected. That might be an argument in favor of taking benefits early and getting while the getting's good. Until that day, however, the most sensible tactic for many people will be to postpone benefits and enjoy those bigger checks.
If you are eligible for benefits, you can start collecting as soon as you're 62. But there's a trade-off. At 62 you'll receive a benefit that's roughly 30 percent less than what you'd get if you waited until your "full" retirement age. For anyone born between 1943 and 1954, that's 66. What's more, once you start receiving a reduced benefit, it stays reduced, even after you reach full retirement age.
POSTPONING PAYS
If you put off collecting until after full retirement age, you'll be rewarded with a benefit that could be about 30 percent higher than the full one. Once you reach age 70, your benefit won't get any higher, so you might as well start collecting.
The differences in dollar terms can be considerable. For example, a worker eligible for a monthly benefit of $1,610 at age 62 would receive $2,190 a month if he or she waited until age 66 to collect, and $2,945 a month at age 70. Those amounts would be subject to cost-of-living increases in the years ahead.
About half of all workers in the U.S. these days start collecting benefits at age 62, and 70 percent do it before their full retirement age. Are they too eager to cash in? Maybe so--unless, of course, they are forced by economic circumstances to take early retirement. As an analysis by the Consumer Reports Money Lab shows (see Waiting to collect), if you have enough income to support yourself without a Social Security check, the decision about when to start collecting is largely a bet on how long you're likely to live. And given that average life expectancy continues to rise, the odds in favor of delaying are becoming stronger.
According to the latest data from the National Center for Health Statistics, men who turned 65 in 2004 had a life expectancy of 17.1 more years, meaning they were likely to reach age 82. Women at 65 had a life expectancy of 20 more years, taking them to age 85. What's more, your life expectancy increases as you age. So, men who were 75 in 2004 had a life expectancy of 10.7 more years (for a total of 85.7 years), while women had 12.8 more years (for a total of 87.8). Those are simply averages, of course, and many people will live, and collect their benefits, even longer.
You can guess at your likely life expectancy by considering how long your relatives lived and assessing how healthy you are. Online calculators, such as the one at www.choosetosave.org, can also help.
OTHER CONSIDERATIONS
If you plan to keep working, that's another reason to delay. From 62 up to the year you reach full retirement age, you'll lose $1 in Social Security benefits for every $2 of your earnings over a certain annual amount, currently $12,960. In the year you hit full retirement age, a new formula kicks in: Earn more than $34,440 a year and you forfeit $1 in benefits for every $3 above that threshold. But starting with the month you reach full retirement age, you'll no longer be penalized for working.
A final, and unpredictable, factor to consider is the health of the Social Security system. With growing numbers of retirees, the Social Security Trust Fund will be paying out more in benefits by 2017 than it takes in, according to the 2007 trustees' report. By 2041, its reserves are projected to run out. At that point Congress will face some tough options, one of which could be reducing retirees' benefits.
So it's possible that you won't get as much as you expected. That might be an argument in favor of taking benefits early and getting while the getting's good. Until that day, however, the most sensible tactic for many people will be to postpone benefits and enjoy those bigger checks.
