When to start taking Social Security benefits becomes a tricky issue for many
By Leonard Wiener
Turn 65, collect Social Security. Sounds right, but here are two reasons to rethink that workplace chestnut:
Age 65 isn't a defining Social Security moment for many. More than 60 percent of those who apply for Social Security retirement benefits do so before 65, many as early as 62. The deal: a permanently reduced monthly check in exchange for a bird in the hand.
This year is the last in which someone can retire with full benefits at age 65. As a result of legislation passed in 1983, the standard or "full" Social Security retirement age is now rising. Those who turn 65 in 2003 must wait until two months past their birthday to qualify for full benefits. The more recent your birth, the further out your Social Security retirement age--topping out at 67 for late boomers born after 1959.
Here's the rub for many coming retirees: The minimum age for collecting benefits remains 62--an irresistible lure for 46 percent of applicants. But the penalty for early collection gets steeper. In the past, someone applying at 62 suffered a 20 percent cut from the benefits that would have been paid at 65. But now the discount is gradually increasing to 30 percent to reflect the rising standard retirement age. That maximum hit will apply to someone born after 1959 and retiring at 62. The closer you are to the age when you would collect full benefits, the less the reduction for starting early. Someone born after 1959 who retires at age 64, for example, will suffer a less severe 20 percent reduction.
Meanwhile, a bonus for not hanging it up is growing as the formula for benefits is upgraded to more fairly compensate people who delay tapping Social Security's coffers. Seniors who work beyond their normal retirement age--and forgo collecting benefits--will be able to enhance their eventual monthly benefit by as much as 8 percent for each extra year they work until 70. "It then makes no sense not to take benefits," says Carolyn Cheezum, a Social Security spokesperson. The bonus, which is gradually being raised, has been as little as 4.5 percent for some recent retirees. One result: Fewer than 2 percent of recent applicants for benefits waited until 70 to collect.
For people nearing retirement--or planning for that day--the changing rules complicate the decision of when to claim benefits. Those who can dispassionately judge their mortality may want to place an actuarial bet with Uncle Sam. Social Security formulas roughly match your life expectancy with the benefits you get. People who start collecting a reduced amount early in life come out more or less even with people who collect more later in life. Live longer than expected, however, and you get more than the government planned to pay; die too soon and Uncle Sam wins.
It's all iffy, of course, but if you expect to live long because of good health and family longevity, you may want to wait for the standard retirement age to collect a full benefit for a long time. The very first recipient of a monthly Social Security check--Ida May Fuller, a legal secretary from Ludlow, Vt.--won that bet big time. She started collecting retirement benefits at 65 in 1940 and did so until her death in 1975 at 100. Average life expectancy today at 65? About 81 for a man, 84 for a woman. Feeling poorly or have an adverse family history? Start collecting a reduced amount as soon as you can. Betting on a short life but living long, of course, is a wager you probably won't mind losing. And even many of those in fine health can't resist the instant gratification and security of getting their money fast, despite the discount.