Decisions Decisions

Imagine for a moment that you are one of the few lucky people in America still covered by a defined benefit pension plan. Now imagine that you’ve reached the ripe old 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 around for a few more years, so he presents you with three options:

1. Retire now and you can start collecting your $1,500 per month pension.
2. Retire four years from now and he will bump your pension up by more than a third to just under $2,000 per month.
3. Stick around for eight more years and he will increase your pension by more than 75 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, except the “pension” is called Social Security and the “employer” is Uncle Sam.

You will have four basic choices when it comes to claiming Social Security. Three of those were mentioned above: Retire early, retire on time (age 66 or 67 for most baby-boomers) or retire late. The fourth option is called file and suspend (more on that later). If married, your spouse will have the same options.  

According to the Social Security Administration more than 73 percent of people start taking benefits early. Should you go with the majority or heed Oscar Wilde’s warning that “Everything popular is wrong.”? It depends.  

Your goal should be to choose the option or combination of options that will result in the greatest cash flow for you and your family. Generally speaking, the longer you wait, the higher your benefits will be, but waiting isn’t a given. Below are 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 benefits early, chances are good that your benefits will be reduced. If you earn more than the earnings limit ($14,640 for 2012), your benefits will be reduced by $1 for $2 you make above the limit. That penalty shrinks in the year that you reach full retirement age. This is more of a delay than a permanent reduction. Once you reach full retirement age, the earnings penalty goes away and Social Security will recalculate your benefit amount to credit you for the months you were penalized. Still, if your plan is to file early in order to supplement your income, you may have less coming than you thought.

Do you have a long life expectancy?

Some people spend only a few years in retirement, while others spend decades. Consider the life expectancy of both you and your spouse. If you are healthy and expect to be collecting benefits for a long time, it might benefit you to delay filing for Social Security until you have accrued the maximum benefit. Alternatively, if your health is poor, you might consider collecting benefits as soon as possible, unless your spouse is healthy and is relying on your earnings history (spousal benefits allow 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 be stuck with those reduced benefits for the remainder of his or her life. Be sure to 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’t be 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 if you 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 affect the 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. The decision that maximizes your lifetime benefits might drastically reduce those of your 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 based on his or her earnings history, it could make sense to apply for those benefits now 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 make sense for him or her to employ a file and suspend strategy. Here your spouse would file for benefits, but ask the Social Security Administration to suspend the payment of those benefits. Because you can’t file for benefits on their record until they do, this would allow them to continue earning delayed retirement credits, but would 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 70 to collect as opposed to 62. That’s a compound rate of growth of more than 7 percent per year to your benefits. Can you get a better rate of return with your personal investments? Certainly not with a money market or certificates of deposit whose rates are at multi-decade lows. You might be able to get that kind of growth in stocks, but not without added risk. My point? If your benefits are growing faster than your personal investments, it might be better to tap your nest egg first and wait to take Social Security until later.

Thankfully, there are many tools available to help you evaluate your options. One such 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 when it comes to your retirement.

FPA member Joseph R. Hearn is the Vice President at Teckmeyer Financial and author of the books If Something Happens to Me and The Bell Lap: The 8 Biggest Mistakes to Avoid as You Approach Retirement.