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Study Social Security

| Sunday, May 11, 2003

In a few years, the oldest of the baby boomers will reach 62, the age at which workers first become eligible for Social Security old-age benefits. And, if history is any guide, about half of them will opt to start getting those monthly checks.

It's understandable. A government agency says, in effect: You want money• You say: Sure.

But experts caution that for a lot of people, this reflexive response may not be the smartest one.

Getting the most from Social Security involves -- as is increasingly the case with private retirement plans as well -- making accurate predictions about your lifespan, inflation and investment returns. The best most of us can do on that score is to make some informed guesses. But given that Social Security is the most fundamental part of our social safety net, it's worth the effort to look at the rules and weigh them against our own situation.

First, understand that you do not need to stop working to receive benefits, you only have to hit one of the target ages. So, there are three thresholds for receiving benefits: early retirement, full (or normal) retirement and delayed retirement. The benefits at "full retirement" are the "normal" ones. But full retirement, which used to be 65, is creeping upward, and it will be 67 for those born in 1960 or later. Retirees who start drawing benefits between 62 and full retirement get less money; those who start between full retirement and age 70 get more.

The reduction that is imposed on early retirees is meant to offset the fact that they will receive benefits for more years than a full-age retiree, assuming they both live to their normal life expectancy. And, since full retirement age is rising, so is the reduction in benefits.

So while folks born in 1937 (the last year for which full retirement age was deemed to be 65) or earlier took a 20 percent haircut for starting benefits at 62, those born later will see bigger reductions.

For example, those in the leading edge of the baby boom (those born from 1946 to 1954) will face a 25 percent cut. The tail end of the boomers (born from 1960 to 1964) and younger retirees will see a 30 percent cut, assuming present rules are not changed.

Those who delay receiving benefits past full retirement age -- currently 65 years and two months for people born in 1938 -- will get a larger check when they do start. The additional payment will get bigger for every month a person delays, up to age 70. Beyond 70, there's no additional benefit.

Workers born in 1943 or later, and this includes all the boomers, get an 8 percent bonus for each year up to age 70 that they delay starting benefits.

So here's the bottom line: If you can afford it and live a long time, you do better by delaying benefits. Social Security benefits are adjusted for cost-of-living increases -- COLA-ed, as they say -- so not only do you get a bigger benefit, but in dollar terms subsequent COLA adjustments are larger as well.

For example, a boomer born in 1948 and now age 55 and earning $50,000 a year could expect a monthly benefit (in 2003 dollars) of $1,010 by retiring at 62; $1,453 by retiring at the normal retirement age of 66; and $1,998 by retiring at 70, the Social Security Administration estimates.

Figuring in inflation and doing the computations in nominal (future) dollars, that translates to benefits of $1,337 at 62, $2,115 at 66 and $3,315 at 70.

If you are in poor health or for some other reason figure you won't live into your 80s, then taking benefits sooner looks better.

First, there are other retirement assets you might have.

If you have a traditional pension from a private employer, there may be a Social Security "carve-out," meaning that your pension is reduced by a portion of your Social Security benefit. Talk to your personnel office about this, and be sure you understand it. Sometimes people figure their Social Security, figure their pension and then add them together. That may be misleading.

Private pensions typically are not COLA-ed, either, so it can make sense to put off Social Security so you get a larger benefit and a larger COLA amount later as your pension is eroded by inflation.

Government pensions also can be affected by Social Security, so if you are eligible for both, check to see if there's an impact on you.

In addition, you might figure that if you draw benefits early it would allow you to leave 401(k) or other savings invested in the stock market. In good times that could push your break-even point further into the future, but it may not be something you'd want to bet on.

Additional Information:

On the Net

The Social Security Administration's Web site , includes all the rules and even has life-expectancy tables. It has quick and dirty calculators to give you a rough idea of your benefits, and very detailed ones if you want a more accurate estimate. It also does 'break-even' calculations that give you an idea of how long you have to live to come out ahead by delaying benefits.

The SSA's calculations apply only to Social Security, of course, and there are other factors involved for some people.

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