Personal Finance: When should you begin taking Social Security? It depends

Personal Finance: When should you begin taking Social Security? It depends

October 2nd, 2013 by Christopher A. Hopkins in Business Diary

Chris Hopkins

Chris Hopkins

Photo by Patrick Smith /Times Free Press.

Baby boomers who already have not reached this milestone will soon be confronted with a decision. Should I begin receiving Social Security benefits as soon as I am eligible, or should I wait? And how long should I wait? The answer to these questions can have a very material impact on monthly cash flows for the rest of your life.

And yet, paradoxically, the correct answer is elusive and quite squishy, since any evaluation necessarily requires several assumptions regarding future inflation, interest rates and government policy decisions. Oh, and most importantly, how much longer you plan to live.

For most people, it is generally best to wait as long as possible (up to age 70), assuming average life expectancy and sufficient income before retirement to meet living expenses.

As most Boomers know (or are soon to discover), Social Security benefits are computed based upon the so-called Normal Retirement Age, currently 66. However, recipients may choose to begin payments as early as age 62. Starting before the NRA results in smaller monthly checks, and that reduction is permanent. If you retire at the earliest possible date, your payments will be 25 percent less than the amount you would receive at your NRA. And remember that any future inflation adjustments will be based on the reduced amount.

Also, bear in mind that you still must wait until age 65 to begin Medicare. And importantly, if you continue to work, your Social Security benefits may be reduced by one dollar for every two dollars in earnings.

For some people, however, waiting may not be the best option. Life expectancy is the single most relevant factor in the computation. An average male who attains age 62 this year is expected to live to age 84. If you are in poor health or otherwise believe that your likelihood of attaining that age is low, you might wish to consider starting sooner. And of course, personal financial conditions may warrant early enrollment if you are not able to make ends meet.

On the other hand, delaying to age 70 would offer a 62 year old the promise of a monthly benefit 32 percent greater than the NRA payout. Furthermore, once you have exceeded the NRA, you can no longer be penalized for any additional wage income you might earn from continued employment. This option is most likely best for someone who anticipates beating the actuarial odds and living beyond the statistical prediction.

In the end, it is not particularly useful to obsess over minute estimates of inflation and rates of return in making the decision. The system is designed to be "actuarially neutral"; that is, to provide the same total real lifetime benefits regardless of when you begin, if you attain and average life expectancy. Most simulations that incorporate the time value of money end up predicting break-even ages between 80 and 86 with lots of slop in between.

Therefore, it is probably best to focus on the biggest financial risk of all: living too long. If there is a reasonable likelihood that you might exceed the age predicted by the tables, then it makes sense to delay at least until your Normal Retirement Age if at all possible.

Christopher A. Hopkins, CFA, is a vice president of Barnett & Co. Investments.

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