Q: My annual notice from the government says that if I start taking my Social Security benefit in eight years, at age 62, I'll get about $1,500 a month. But I'll get about $2,000 if I wait until I'm 66, or $2,700 if I wait until I'm 70. Which is the best option?
A: At first glance, it certainly looks like it would pay to wait as long as possible. But that's not necessarily the case -- which is good news for anyone who can afford to retire early.
Obviously, it makes financial sense to postpone retirement -- you'd have more time to add to your savings, more time for them to compound and fewer retirement years to pay for.
But let's set that aside and assume you could afford to stop working at 62. You'd have two options.
First, you could start taking that $1,500 a month Social Security benefit and use it for living expenses. Though it's far less than the $2,700 you'd get by waiting until age 70, you'd get eight additional years of payments totaling $144,000, not counting any cost-of-living increases.
When you reach 70, you'd still be receiving that $1,500 a month -- $1,200 less than if you'd started at 70. But it would be 10 years before that loss equaled the money you'd received in the previous eight years. So starting early wouldn't really hurt you financially until you turned 80.
In a second approach, you could retire at 62, start collecting $1,500 a month and invest it.
Assuming an annual investment return averaging 6 percent, this sum would grow to about $184,000 in eight years. Starting at age 70, you could draw about $12,000 out of that account every year, nearly making up for fact that after 70 you'd be getting $1,500 a month instead of $2,700.
You could keep these withdrawals up until you turned 100 before the account was emptied, assuming you continue to earn 6 percent a year on the account. Moreover, the withdrawals could be increased by 3 percent each year to counter inflation.
In other words, starting benefits at 62 instead of 70 really wouldn't cost you anything. It would provide a nice rainy-day fund -- or an asset to leave your heirs.
This simplified example leaves out taxes and other factors, such as changes in inflation rates or the benefit your spouse would get if you die first.
The point is that you might cheat yourself out of some good retirement years by simply assuming you've got to wait as long as possible to start taking Social Security.
The younger you are when you die, the more likely it will pay to start benefits early: If you start at 62 and die at 70, you'll receive $144,000. Wait until 70 to start and you'll get nothing if you die at 70 or earlier.
Clearly, anyone approaching retirement age should do some research. Start with the annual statement that comes three months before your birthday. It includes a year-by-year record of your earnings. Be sure it's correct.
The statement also has an estimate of your benefits in retirement, assuming you continue to earn about as much as you have for the previous two years.
The Social Security Administration has many publications on benefits. Order them at (800) 772-1213 or find them on the Internet at www.socialsecurity.gov.
Among issues to consider:
Working while receiving Social Security. If you have not reached "full retirement age," your benefit will be reduced by 50 cents for every dollar you earn over that year's limit -- $11,640 in 2004. After you reach that age, there is no penalty.
Full retirement age is 65 for those born in 1937 or earlier. It gradually rises to 67 for folks born in 1960 or later.
Taxes. It seems like a raw deal, but Social Security benefits are subject to tax if the recipient's total income exceeds certain limits -- $25,000 for single people, $32,000 for couples. Any good tax guide will explain how this limit is figured.