Imagine for a moment that you are one of the few lucky
people in America still coveredby a defined benefit pension
plan. Now imagine that you've reached the ripeold age of 62 and
you're considering hanging up your work boots (or Wingtips)and
heading off into retirement. Your employer would like to see
you stick aroundfor a few more years, so he presents you with
- Retire now and you can start collecting your $1,500 per
- Retire four years from now and he will bump your pension
up by more than a thirdto just under $2,000 per month.
- Stick around for eight more years and he will increase
your pension by more than75 percent to around $2,625 per
If only you were so lucky, right? Actually this is more than
just a hypothetical.You will likely face a very similar
decision as you plan for your retirement, exceptthe "pension"
is called Social Security and the "employer"is Uncle Sam.
You will have four basic choices when it comes to claiming
Social Security. Threeof those were mentioned above: Retire
early, retire on time (age 66 or 67 for mostbaby-boomers) or
retire late. The fourth option is called file and suspend
(moreon that later). If married, your spouse will have the same
According to the Social Security Administration more than 73
percent of people starttaking benefits early. Should you go
with the majority or heed Oscar Wilde'swarning that "Everything
popular is wrong."? It depends.
Your goal should be to choose the option or combination of
options that will resultin the greatest cash flow for you and
your family. Generally speaking, the longeryou wait, the higher
your benefits will be, but waiting isn't a given. Beloware
several questions to consider that will help you evaluate when
Are you still working?
If you are still working and you decide to begin receiving
Social Security benefitsearly, chances are good that your
benefits will be reduced. If you earn more thanthe earnings
limit ($14,640 for 2012), your benefits will be reduced by $1
for $2you make above the limit. That penalty shrinks in the
year that you reach full retirementage. This is more of a delay
than a permanent reduction. Once you reach full retirementage,
the earnings penalty goes away and Social Security will
recalculate your benefitamount to credit you for the months you
were penalized. Still, if your plan is tofile early in order to
supplement your income, you may have less coming than
Do you have a long life expectancy?
Some people spend only a few years in retirement, while
others spend decades. Considerthe life expectancy of both you
and your spouse. If you are healthy and expect tobe collecting
benefits for a long time, it might benefit you to delay filing
forSocial Security until you have accrued the maximum benefit.
Alternatively, if yourhealth is poor, you might consider
collecting benefits as soon as possible, unlessyour spouse is
healthy and is relying on your earnings history (spousal
benefitsallow your spouse to either claim their benefit or half
of yours, whichever is greater).In that case, if you file early
and receive reduced benefits, your spouse will bestuck with
those reduced benefits for the remainder of his or her life. Be
sureto consider how your actions affect your spouse's benefits
Will you have health insurance?
You can begin collecting Social Security benefits as early
as age 62, but you won'tbe eligible for Medicare until 65. It's
not a good idea to be without coverage,so make sure you have a
plan to replace your employer provided health coverage ifyou
decide to retire early.
Do others qualify for benefits based on your earnings
If someone is filing based on your benefits, when you choose
to file will affectthe benefit that they receive. If you choose
to file early and take a reduced benefit,any person filing
based on your record will take a reduced benefit as well.
Thedecision that maximizes your lifetime benefits might
drastically reduce those ofyour spouse. Keep that in mind.
Do you qualify for benefits on someone else's
If your spouse or former spouse has died and you qualify for
survivor benefits basedon his or her earnings history, it could
make sense to apply for those benefitsnow and wait to claim
your own retirement benefits until later, when they are
If your spouse is still living and has reached full
retirement age, it might makesense for him or her to employ a
file and suspend strategy. Here your spouse wouldfile for
benefits, but ask the Social Security Administration to suspend
the paymentof those benefits. Because you can't file for
benefits on their record untilthey do, this would allow them to
continue earning delayed retirement credits, butwould also
allow you to file for spousal benefits.
Where will you get more growth?
Your Social Security benefits will be about 75 percent
higher if you wait until 70to collect as opposed to 62. That's
a compound rate of growth of more than7 percent per year to
your benefits. Can you get a better rate of return with
yourpersonal investments? Certainly not with a money market or
certificates of depositwhose rates are at multi-decade lows.
You might be able to get that kind of growthin stocks, but not
without added risk. My point? If your benefits are growing
fasterthan your personal investments, it might be better to tap
your nest egg first andwait to take Social Security until
Thankfully, there are many tools available to help you
evaluate your options. Onesuch tool is AARP's benefits
calculator, which you can find at
www.aarp.org/work/social-security .No matter what you
ultimately decide, be sure to consider your options
carefully.Your choice will likely be one of the most important
decisions you will make whenit comes to your retirement.
FPA member Joseph R. Hearn is the Vice President at
Teckmeyer Financial andauthor of the books If Something
Happens to Me and The Bell Lap: The 8 Biggest Mistakesto
Avoid as You Approach Retirement.