How to Maximize Your Social Security Benefits

This is the third of a four-part excerpt from my new book, The Hard Times Guide to Retirement Security (Bloomberg Press/John Wiley & Sons, June, 2010).

No matter what changes are made, it's a sure bet Social Security isn't going away anytime soon -- and it's 100 percent certain that the program will be one of your most important sources of security in retirement. But the amount you'll receive over the course of your retirement isn't assured or automatic.

Maximizing your Social Security benefits will require some good planning and decision making. The most important decision you'll make is when to enroll. Dozens of news stories appeared in January 2007 when the country's oldest baby boomer turned 62 and promptly signed up for Social Security.

But it probably wasn't a very smart financial move. About half of all Americans do file at 62 -- the first year of eligibility for benefits. But for most people, it's a costly mistake that will mean forgoing thousands of dollars in lifetime benefits -- in some cases, hundreds of thousands.
Although you can file for benefits at 62, most Americans will receive larger lifetime payouts by waiting, if at all possible, until they reach age 66 or even 70. But it's a bit of a gamble, because the math all depends on how long you live.

Remember that Social Security is a public insurance program. It's built around actuarial principles -- essentially, the mathematics of risk. And a central actuarial idea behind Social Security is the NRA, a rule used by the Social Security Administration (SSA) not only to ensure the system pays out fairly among all beneficiaries but also to ensure that funding is adequate as the longevity of the average American increases.

The NRA has been rising gradually over the years; currently, it is age 66 for anyone born from 1943 to 1954, and slightly older for people born thereafter.

If you file for benefits early -- that is, before the typical NRA of 66 -- the government reduces your benefit accordingly to avoid paying higher lifetime benefits to you than it does to someone who waits until their NRA.

Under the rules, your lifetime benefits will be reduced based on an actuarial projection of your longevity. Let's say your NRA is 66 but you retired and started taking Social Security at 62. That means you retired four years early. The net effect: Your annual benefits will be reduced permanently by a total of 25 percent.

On the other hand, SSA's rules offer incentives for you to wait past your NRA. The SSA will bump up your payment an additional amount for every year you delay filing for benefits. The net effect is that if you wait until age 70, your annual benefit will be 32 percent higher than it would be if you started at age 66-and you also get all the cost-of-living adjustments (COLAs) from the intervening years.

You'll come out ahead so long as you or your spouse live past what's called the break-even age. That's the age where the total benefits paid to those who are patient begin to exceed total payouts to those who take early benefits. That age is around 80 and in the case of more than 80 percent of American couples, the husband or wife will live past that age.

This can mean hundreds of thousands of dollars in additional lifetime benefits, assuming you or your spouse lives many years beyond the break-even age. An individual who takes benefits at age 62 instead of 70 would receive $140,000 less in total lifetime benefits if that person or his spouse lived to age 90. And if the man or woman lives to age 95, then the loss is even higher -- about $275,000. (The calculations assume an average Social Security benefit of $1,000 per month.)

Next week: Launching your own business after age 50.

Reprinted with permission of John Wiley & Sons, Inc.

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