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By: Financial Planning Association
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 three options:
- Retire now and you can start collecting your $1,500 per month pension.
- 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 month.
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 options.
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 to file.
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 youthought.
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 and vice-versa.
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 record?
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 record?
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 higher.
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 later.
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.