Make a wise Social Security choice

MarketWatch

BOSTON — Many Americans take Social Security early, at age 62, because they really need it. They’re in poor health or unemployed or both. Others take benefits early because they’re worried they’ll lose out on what’s rightfully theirs if benefits are reduced. But few people try to figure out the best age to take Social Security — and that’s a serious mistake.

Even though it’s challenging, calculating the best time to take benefits is well worth it, especially given that Social Security represents about one-third of the average retiree’s income.

What’s key is evaluating the so-called break-even period to determine whether it would be better to delay Social Security benefits (delaying them means a higher monthly benefit), take a reduced benefit early, or start them at “normal” retirement age. Of course, there’s a good reason why so few people really do the calculations.

“When to begin Social Security retirement benefits is a challenging question that vexes many financial planners and clients,” Michael Kitces, editor of The Kitces Report, wrote in a recent issue.

Living beyond the break-even point can produce large amounts of wealth relative to the risk. But delaying Social Security benefits does represent a serious risk, Kitces said: If you wait and then die before claiming your benefit, it really messes things up for your widow. Still, there are situations in which delaying Social Security retirement benefits can pay off significantly.

“Is it better to begin payments early, or to delay Social Security and forfeit current payments to receive a larger income stream in the future?” he said.

“Although the analysis of such a question would seem relatively straightforward, the complex rules of Social Security make the evaluation more difficult, especially when evaluating the implications of living beyond the so-called ‘break-even’ point.”

Here are the things you should consider to make a more informed decision.

UWhat’s your normal retirement age?

The first order of business: You need to know what your normal retirement age, or NRA, is. If you were born in 1937 or earlier, it’s 65. If you were born in 1960 or later, it’s 67. And if you were born between 1938 and 1959, it’s somewhere in between.

Of note: If you were born in 1943, your NRA is 66. And since it’s now 2009, that means anyone born in 1943 is now at NRA, the age at which you can receive your full Social Security benefit.

You can find your NRA at this Social Security Web site: http://www.ssa.gov/OACT/ProgData/nra.html.

Once you know your NRA, you can calculate how much Social Security benefits will be increased or decreased if you choose to take your benefit later or earlier than your NRA.

You can get more information from this Social Security Web site: http://www.ssa.gov/OACT/quickcalc/early—late.html

UWill you be working?

Next, you need to determine whether you’ll be working, especially if you have not yet reached full or normal retirement age, according to Kitces.

Because of Social Security’s earnings test, Kitces says it’s almost always a bad idea to take Social Security benefits early if you have earned income greater than the earnings test threshold. Social Security withholds benefits if your earnings exceed a certain level, called a “retirement earnings test exempt amount,” and if you are under your NRA.

UHow’s your health?

At the end of the day, Kitces said the most significant factor in the entire process of evaluating the decision to delay Social Security is whether you’re likely to live long enough to receive value from higher monthly benefits.

The shorter your life expectancy, be it because of health, genetic, or other relevant factors, the less prospective value to delaying Social Security.

You can calculate your personal life expectancy at Living to 100.com.

Besides calculating your life expectancy, you need to calculate your personal break-even number. Don’t blindly accept some rule of thumb that you’ve read — crunch the numbers.

One such calculator can be found at analyzenow.com with others on the Social Security Web site, www.ssa.gov.