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Saving for Retirement

4. Choose Your Date

The government pegs the "normal" Social Security retirement age at 65 to 67, but yours is really up to you -- and it's a big decision. Ron and Monica Reimer could begin collecting Social Security benefits next year when they both turn 62, but their checks would be reduced by 25% for the rest of their lives. Or they can wait until their normal retirement age of 66 and get full benefits. Your best starting date depends on several factors, including: Do you plan to work beyond 62? Will you need money immediately? Are you concerned about providing the largest monthly benefit for a surviving spouse?

If your vision of retirement includes work, as it does for more than three-fourths of baby-boomers interviewed in a recent Merrill Lynch study, then claiming Social Security at 62 is a mistake. Should you continue working, there's an "earnings cap" penalty on Social Security benefits paid prior to your normal retirement age. Earn more than the cap -- $12,480 for 2006 -- and you forfeit $1 in benefits for every $2 you make over the limit. Once you reach your normal retirement age, the earnings cap disappears.

MAKE YOUR MONEY LAST

1. Get a Checkup

2. Set Your Budget

3. Do a Dry Run

4. Choose Your Date

5. Consider an Annuity

6. Roll It Over

Investing in Retirement

Extreme Early Retirement

For the Reimers, who live in Georgetown, Tex., the decision is not clear-cut. Since neither spouse is employed, the earnings cap doesn't matter. With Ron's pension from DuPont and their stash of other retirement savings, they don't need the Social Security money. Still, they want to know the best time to start collecting benefits.

Thomas Dalton, a professor of accounting and taxation at the University of San Diego, says a single, nonworking 62-year-old would be better off taking Social Security as soon as possible because doing so reduces the need to tap tax-deferred retirement funds. "The advantage of leaving retirement funds in a tax-deferred account earning 8% far outweighs the loss in Social Security benefits from early retirement," Dalton wrote in the June 2006 issue of The CPA Journal. Even at 5%, the early retiree would still come out ahead until age 89. Waiting until normal retirement age to collect benefits would pay off only if a retiree lives past 89.

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The situation is different for married couples, says Henry Hebeler, author of J.K. Lasser's Your Winning Retirement Plan. Hebeler agrees that taking reduced Social Security benefits at 62 might be the right thing to do if you've been forced out of your job and need money or if you're in poor health and doubt that you'll live to 66 or 67. But delaying is wisest for most married couples, he says. A surviving spouse is entitled to 100% of the primary wage earner's benefits. So if Ron wants to leave the most income possible for Monica, he should wait until his normal retirement age or later to tap Social Security benefits. That way, Monica would be entitled to the maximum survivor benefit -- including annual cost- of-living adjustments -- for life.

Also, because Monica earned a small Social Security benefit based on her earnings history, she can claim her own retirement benefits earlier without jeopardizing her future survivor benefits. Although her retirement checks would be 25% smaller at 62, she would still be entitled to the full survivor benefit -- worth 100% of Ron's monthly retirement payments -- as long as she is at least 66 when she begins to collect it.