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« Do You Monte Carlo? | Main | Numer, Number, Wherefore Art Thou or When is Enough Enough »
Wednesday
Dec122007

Ask Yourself One Question: "Do I Feel Lucky?" Well, Do Ya Punk?

 

I am still nearly four years from being able to tap the Social Security spigot, but that little check does figure prominently into my retirement plans.  As I was considering my Social Security benefits, it occurred to me that the immortal words of "Dirty Harry" Callahan are quite applicable to us "boomers" as we prepare for our Social Security era.  Let me explain.

If you, like many of us boomer, were born between 1943 and 1954, you can take your full benefits at 66.  However, you can begin taking benefits as early as 62 if you do not mind your monthly check being permanently reduced by 25%.  For each year you delay beyond your normal retirement age of 66, you will receive an extra 8% per year until you reach the age of 70.  The majority of retirees in the past have chosen to begin taking benefits as soon as possible, even though it meant accepting reduced benefits for the rest of their lives.  A "bird in the hand" kind of thing, I suppose.

As we retirees face spending more time in retirement (read, "living longer"), perhaps we should reconsider the plan of signing up for Social Security as soon as we can.  To quote Conrad Ciccotello, a professor of financial planning at Georgia State University, "longer life expectancies make that decision to take benefits early less appropriate."  Now to the Social Security Administration (SSA), it makes no difference which choice you make, because they have determined that over the average lifetime, the total value of the higher benefits taken later equals the total value of the smaller benefits taken earlier.  Therefore, to them you see, it all comes out in the wash.  But for you, once you live beyond your "break even" age, you would have been better off waiting to collect full benefits at you "normal" retirement age, as the SSA calls it.  You can calculate your "break even" age at the SSA's web site http://ssa.gov/.  Just enter "break even" in the site's search window, and it will take you to the calculator.  You will need the information from your estimate of benefits that you get each year from the SSA to use the calculator, but it will really give you something to ponder.  I ran the calculations for myself and learned that my break even age is 77 years and two months.  Since my grandfather lived to be 88 and died while lugging watermelons from his garden, and my dad lived to be 84, I have some expectations of making it past 77 if I can avoid that teenager driving while texting!  Financially speaking, I am better off if I delay taking my benefits until my normal retirement age of 66 if I make it to 77 years and two months.  So what is an aspiring retiree to do?  I suppose I have to ask myself one question ala Dirty Harry: Do I feel lucky?  "Well, do ya punk?"

There are no ambiguities in two cases, however.  If you need the benefits to make ends meet, then you take the benefits.  If you are still working at 62, then you do not take the benefits since you will lose $1 in benefits for each $2 you earn over the earnings limit of $13,560 in 2008.  If you are past your normal retirement age,  66 for me, then you can earn any amount and still draw your full benefit without any penalty.

So the question for many comes down to the question of how long will I live.  There are even web sites that purport to help answer that question, but generally if you are in good health at 62, and do not immediately need the benefits, you would want to seriously consider delaying.  There are those who suggest that one should take the benefits even though they may not need them immediately as they could then invest their monthly checks and perhaps earn more through their investments that they would by delaying. This is problematic, however, as it depends not only on their skill/luck as investors, but also on the vagaries of the market.

There is another aspect to this decision for married couples, especially if the wife has earned less over her career than her husband.  The wife (or either spouse) is entitled to claim benefits based on her own earnings, or she can collect a "spousal benefit" that is worth 50% of her husband's benefit.  She can collect her own benefit at 62, but can collect spousal benefits only after her husband files for his.  Many couples have chosen to have the wife collect her own benefits at 62 and then have the husband delay taking his as long as possible.  This technique has two benefits.  It increases the spousal benefit when the husband eventually begins taking his benefit, and it also increases the wife's survivor benefit.  The survivor is entitled to the greater of her own benefit or 100% of the husband's benefit if he predeceases her.  So by delaying his benefits as long as possible, the husband increases his benefit, as well as that which his wife can draw after he dies.  The sad fact of the matter, guys, is that statistically your wife is going to outlive you and by delaying your benefits, you will leave your wife with a larger Social Security payment.

Many couples will find that there is no clear-cut answer to their particular situation.  However, the Social Security web site will give much information as you search for your answer, and I hope that this short discussion will get you started along the right path.

 

Fly/Drive safe!

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