One of the biggest fears most older Americans face is running out of money in their retirement years.  And yet these same Americans don't take full advantage of one of the best resources to address this fear--Social Security benefits, which provide a lifetime income that ranges from 25% to 45% of their pre-retirement pay.  For many people, those benefits could be the only guaranteed lifetime income they'll receive.  So wouldn't it be smart to take appropriate measures to insure that income is as large as possible? 

You can do that simply by delaying your Social Security benefits for as long as possible (but no later than age 70).  Unfortunately, most older Americans aren't doing that.  Instead, they're making poor choices regarding their Social Security income by starting it much too early. 

My goal--and the whole point of the strategies and ideas I offer in my newsletters--is to help you make smart choices in all aspects of your rest-of-life.  This month's newsletter delves deeper into the topic of Social Security benefits so you can make the right decision about the best time to start receiving those benefits. 

Social Security Is a Great Benefit! 

There are five really great advantages that Social Security income offers retirees: 

• First, you'll receive a monthly income for life, no matter how long you live. 
  
• Second, if you're married, Social Security income continues for your spouse after you die, no matter how long he or she lives. 
  
• Third, your income is increased for inflation each year; most private pensions don't have this adjustment.
  
• Fourth, your Social Security benefits are not affected by what happens in the stock market.
  
• And finally, for many people, income taxes on Social Security benefits are eliminated or reduced significantly.  

No other benefit or financial asset has this combination of powerful advantages!

Recall from my May 2009 newsletter that Social Security income is also the only financial asset that performs well in all economic climates; all other financial assets or benefits have their good times and their bad. 

If Social Security is this good, you'd think that people would want to wring the most out of it as possible.  But that's just not happening.

The Big Mistake Most People Are Making

According to statistics from the Social Security Administration, half of all Americans start receiving benefits at age 62, the earliest possible age with the lowest amount of monthly income.  And three-quarters of all Americans start before their Full Retirement Age (FRA), typically age 66.  For most people, the choice to take Social Security benefits as soon as possible results in smaller total income payable over their lifetime, compared to the total income they'd receive if they delayed starting their benefits. 

To understand why this could happen, let's take a look at ....

The Basics About Social Security Benefits

Social Security has many complicated rules and formulas, so let's just focus on the basics that impact the amount of Social Security income you can receive:

• You need to have paid FICA taxes for at least 35 years to receive full benefits; otherwise, benefits are reduced.
• Starting benefits before your full retirement age (FRA) decreases your income. Age 62 is the earliest possible starting age.
• Starting benefits after your FRA will increase your income, at least until age 70. At that point, there are no further increases that come from delaying your income.
• Your spouse receives a separate income, based on the greater of his or her own earnings, or 50% of your benefit (this latter amount is commonly called the spousal benefit).
• Reductions for early retirement or increases for delayed retirement for your spouse's benefits are based on your spouse's age.
  

So just when is your Social Security full retirement age (FRA)?  Here's how to determine that:

          If you were born in            Then your FRA is
                1937 or earlier                       65 years
                    1938                         65 years, 2 months
                    1939                         65 years, 4 months
                    1940                         65 years, 6 months
                    1941                         65 years, 8 months
                    1942                         65 years, 10 months
               1943 - 1954                             66 years
                    1955                         66 years, 2 months
                    1956                         66 years, 4 months
                    1957                         66 years, 6 months
                    1958                         66 years, 8 months
                    1959                         66 years, 10 months
              1960 or later                            67 years

Estimating Your Benefits

Shown below is a table that provides an idea of the amount of monthly Social Security income you can expect to receive based on your wages.  These figures were estimated using the calculators on the Social Security Administration's website and by making the following assumptions:

• Years of birth ranging from 1945 to 1965.
• Amounts shown are in 2009 dollars and do not reflect future adjustments for increases in wages or cost of living.
• The worker paid FICA taxes for 35 years to get the maximum benefit.
• The worker always made the salaries shown in the left column, adjusted for changes in average wages before 2009.

This table is for people who work throughout their lives.  If you're married and your spouse also worked a full career, then each of you would get a benefit as shown in this table based on your own wage history, and your household income would be the sum of both incomes.

                      
 Current                        Age Income Begins
  Salary              Age 62                     FRA                      Age 70   

 $50,000    $1,130 - $1,170    $1,490 - $1,700    $2,050 - $2,140

 $75,000    $1,430 - $1,480    $1,930 - $2,090    $2,580 - $2,680

$106,800   $1,730 - $1,820    $2,370 - $2,500    $3,090 - $3,240

Note: $106,800 is the maximum wages considered in 2009

This table offers a general idea of the amounts you might expect to get from Social Security depending on when you begin receiving benefits.  You'll also see that:

• For many people, Social Security benefits alone won't provide a comfortable retirement.
• There is a significant increase in income between starting at age 62, the earliest possible age, and delaying benefits to your FRA or even age 70.

For most people, delaying the start of Social Security benefits is a good strategy for two reasons:

• Social Security benefits may be the only lifetime pension they receive.
• 401(k) balances and other financial resources may not generate sufficient lifetime income.
  

The best way to estimate your Social Security income is to go to the official website of the Social Security Administration (www.ssa.gov).  The site offers calculators that use your own salary history to determine your benefits.  The government also mails you an estimate of benefits and your earnings history each year about three months before your birthday.

When Should You Start Benefits?

So does it ever make sense to start taking benefits as early as possible?  Only if you're in poor health.  If you have average or above average health, it might pay to delay benefits.  Let me show you what I mean. 

The following table shows the total lifetime income for someone earning $50,000 per year in 2009 for three different starting ages: age 62, age 66 (the person's FRA) and age 70. 

• The first row shows the initial annual income. 
• The second row shows the total income over your lifetime if you live to age 70 and then die.  In this case, starting Social Security at age 62 is the best strategy, since the total lifetime income is the highest.
• The third row shows the total lifetime income if you live to age 80 and then die.  In this case, starting Social Security benefits at your FRA is the best strategy, because it provides the highest total lifetime income.
• The fourth row shows the total income you'll receive if you live until age 90 and then die.  In this case, starting Social Security at age 70 is the best strategy.
  

Start Social
Security At:          62 (earliest)    66 (FRA)     70 (latest)

Initial annual
income:                   $17,160        $23,160       $31,080

Live to 70, total
lifetime income:    $137,280        $92,640                 $0

Live to 80, total
lifetime income:    $308,880      $324,240      $310,800

Live to 90, total
lifetime income:    $480,480      $555,840      $621,600
   
Note: Italicized numbers emphasize highest lifetime income.

The above table shows why it's good to have an estimate of how long you might live.  My April 2009 newsletter showed that the average age at death for Americans who are currently in their 50s and 60s is their mid-80s.  This suggests that delaying Social Security benefits until FRA or beyond is the best strategy.  If you're in good health and expect to live even longer than the averages, then you might consider delaying until age 70.  Two good online calculators that can help you estimate your life expectancy based on your family history and lifestyle are: www.livingto100.com and www.bluezones.com. 

If you're worried about how you're going to make ends meet until you start receiving Social Security benefits, you may need to think about working while you still can in order to let your Social Security benefits grow.  This can be part time--maybe just enough to make up for the Social Security funds you're delaying--or full time if you need more income.  Working in your later years has other advantages that benefit your rest-of-life.  I'll cover that topic more in future newsletters.  See this month's video highlight for how this strategy can help people who started their retirement saving late in life.

Another option would be to draw down your 401(k) and/or IRA balances to meet your living expenses while your Social Security benefits grow.  This strategy might also reduce your income taxes.  However, make sure you don't deplete your savings too quickly.  If your retirement savings are modest, I'd rather see you work to make up for delaying Social Security benefits.

What About Married Couples?

In most cases, delaying Social Security benefits works well for married couples.  A very common situation is where the husband has been the primary wage earner and is older than his wife.  Usually the husband dies before his wife, who would then receive a Social Security survivors benefit based on the husband's benefit.  In this case, delaying the husband's Social Security benefit increases the wife's survivor income.  Since poverty among elderly widows is a serious problem in our country, this strategy can significantly improve widows' financial security. 

Here's one possible exception to the strategy to delay benefits.  Suppose the wife is eligible for a Social Security benefit based on her own earnings and this benefit is much smaller than her husband's Social Security benefit.  In this case, it might be best for her to start receiving her own benefits at an early age even though it might be best for the husband to delay his benefits.  In this situation, determining when to start receiving benefits doesn't lend itself to easy rules of thumb; any decision you make regarding the age at which you'll begin receiving Social Security benefits should be thoroughly analyzed before you take action. 

Before you set your decision in stone, you should read more about the pros and cons of taking benefits early vs. holding off until your FRA or beyond, or work with a financial planner who is knowledgeable about Social Security.

A Few Last Points 

I never cease to be amazed that financial planners and regular citizens alike disdainfully diss the Social Security program.  I could retire right now if I had a nickel for every time I've heard "I'll never get Social Security benefits--it won't be around when I retire." 

Let's face facts:  Social Security is one of the most popular government programs around, and it's highly unlikely that our political leaders will eliminate it, particularly when baby boomers currently comprise the largest voting block. 

Social Security does have funding challenges, however, that can be solved by making relatively modest adjustments.  Bankruptcy of the program is not inevitable, as doomsayers would have you believe.  But we need to support our leaders in making the choices that are necessary to keep Social Security viable and financially healthy for our lifetimes and beyond.

This newsletter series offers insights to help you make important life choices regarding how long you should work and when you can retire.  Make sure you understand these choices; most likely, you'll need to read more than this brief newsletter in order to make the best decisions.  The Resource Center on my website offers additional articles and lists of recommended books and websites.  One excellent article that goes into more detail on the issues in this month's newsletter is Innovative Strategies to Help Maximize Social Security Benefits, by James Mahaney and Peter Carlson.

Determining the right time to start Social Security benefits is one of the key decisions you'll need to make regarding your retirement.  Given current events and trends--the recent financial meltdown, improved longevity and the shift of responsibility for retirement adequacy from employers to individuals--now, more than ever, it's critical to make the most of your Social Security benefits.

 

PS.  If you think this newsletter will help a friend, please pass it along.