Benefit from Social Security Knowledge

Stewart H. Welch III, CFP, AEP

Physician's Money Digest, March15 2004, Volume 11, Issue 5

The answer:

As a financial advisor who works with a large number of retirees and preretirees, I'm often asked whether it's a good idea to begin taking Social Security benefits prior to retirement. It depends. Before I sound like a politician, let me explain. Most Americans think of normal retirement age as age 65, but new laws have adjusted normal retirement age for Social Security purposes to age 67 for those born after 1959.

If you were born between 1938 and 1960, your normal Social Security retirement age will be between age 65 + 2 months and age 66 + 10 months. You can take Social Security benefits as early as age 62, but the payment amount will be reduced. You can also postpone receiving benefits until age 70 and receive an increased lifetime monthly benefit above your normal retirement benefit amount. Of course, deciding when to begin taking your Social Security retirement benefits will depend on your specific situation. Let's look at the following scenarios and see how each affects the final decision:

• Health considerations. If you are in poor health, you may want to consider taking early retirement benefits. While your monthly benefit amount will be smaller, you will receive a greater number of payments. Consider the case of John, who is not in good health. At age 62, he is trying to decide whether he should elect early retirement or postpone taking benefits until normal retirement age (ie, age 65). Between age 62 and age 65, he will receive $28,800 in benefits. Thus, waiting until normal retirement age to receive benefits is the best deal for John only if he lives beyond age 77, his breakeven point.

In other words, John has to believe he will live at least 15 years beyond age 62 to justify waiting until age 65 to take the higher monthly benefit (see chart). How is the breakeven point determined? First, divide the total funds you will receive between age 62 and age 65 by the additional monthly benefit you will receive at normal retirement age (eg, $28,000 .– . $200 = 144 or 12 years). Add the result to age 65 to figure out your breakeven point.

• Job status. You can begin taking early retirement income benefits while you are still working. Unfortunately, if you have not yet reached your normal retirement age, you will be subject to a retirement earnings test and most likely receive reduced benefits.

For example, if you receive early retirement benefits this year, you will lose $1 of Social Security benefits for every $2 of earnings above $11,600. This amount is known as the exempt amount; it increases to $31,080 for the months in the calendar year leading up to the month you reach normal retirement age. Of course, once you reach normal retirement age, your earnings in retirement will no longer reduce your Social Security benefits.

• Marital status. If you elect to take a reduced early retirement benefit and then predecease your spouse, they will be eligible to receive only your reduced benefit. This reduced benefit, however, will not be less than 82.5% of what would have been the full benefit. To begin receiving Social Security benefits, you must notify the Social Security Administration (800-772-1213). The government recommends that you notify the Administration at least 3 months prior to the date you want to start receiving benefits. As you can see, making the right decision concerning your Social Security benefits is a complicated and important financial matter. Therefore, when it comes to your benefits, you would be well served to seek the advice of your financial or tax advisor.

Stewart H. Welch III, founder of the Welch Group, has been rated one of the nation's top financial advisors by Money and Worth. He welcomes questions or comments from readers at 800-709-7100 or www.welchgroup.com. Reprinted with permission from the Birmingham Post Herald.