Should you take your Social Security now or later?

from Bankrate.com

Each year, a few months before your birthday, you receive an innocuous little four-page Social Security statement from the government that could have a big impact on your golden years. Unfortunately, most of us don't take the time to give it more than a cursory glance before tossing it in the nearest circular file.

But the closer you get to decision time, on when you will officially retire and begin tapping the Social Security benefits you've accrued over the years, the more this simple statement can help you determine when retirement might make the most sense -- in dollars and cents -- for you.

Yes, Social Security figures prominently as a safety net for you and your family, should you die suddenly or become disabled. It is also the place to enroll in Medicare; you want to do that at age 65 regardless of whether you retire.

But, determining when to start collecting regular Social Security retirement benefits requires some forethought. Here's how to work through the math to determine when to officially retire and begin receiving your monthly checks.

How benefits are calculated
Let's start with the basics: your Social Security number. It has been used on every tax form you and your employers have sent in since your first day of work to keep track of your earnings. To be fully insured, you need 40 credits earned over your lifetime. You get up to four credits per year based on your earnings. For 2005, you receive one credit for every $920 you earn, so you max out your four credits with an annual income of $3,680 or more.

That's a pretty easy bar to clear, by design: Social Security sprang from the depths of the Great Depression to enable all working Americans to survive when their prime earning years are behind them. Financial planners estimate that Social Security benefits today provide, on average, about 40 percent of what you'll need to maintain your lifestyle once you hang up your dancing shoes.

OK, so just about everybody approaching retirement age qualifies for Social Security. However, the Social Security Administration calculates your benefit amount based on your average earnings over 35 years, not on your number of credits or how much you paid in taxes. That's why it is important to look at page three of your statement, which lists your earnings history year by year, and make sure the figures match up with what you actually earned.

Jack Carney, 57, an accredited asset management specialist with M.W. Boone and Associates in Bellevue, Wash., explains that in calculating your eventual benefit amount, Social Security caps the maximum wage contribution each year. For 2005, the wage contribution cap is $90,000, and the maximum monthly benefit amount at full retirement is $1,939.

"The way it works is, if I made $7,200 my first year out of college, that counts as much toward my Social Security as someone this year making $85,000," says Carney. "If the (wage contribution) cap was $8,000 and you earned $6,000, you get credit for three-fourths of a maximum Social Security benefit year."

The right time to start drawing Social Security benefits

Oh, and about those milestone ages on your statement: Age 62 is the minimum age at which anyone can draw Social Security retirement, though we sometimes confuse it with 59½, which is the minimum age you may tap into many IRAs and retirement accounts without penalty. Age 65, 66 or 67, depending on your birth date, is the age at which you can claim full retirement benefit amounts. Age 70 is the maximum age for purposes of estimating Social Security benefits. Actual benefit amounts available to you between these ages are calculated on a monthly basis. You can get very precise estimates by using the detailed calculator, at the Social Security Administration's easy-to-use Web site, www.socialsecurity.gov. The Vegas factor This brings us to the Vegas factor: your estimated benefits, listed on page two of your statement. A typical baby boomer's numbers might look something like this: At age 62, your payment would be $780 a month. If you work until age 66, your payment would be $1,080 a month. If you work to age 70, your payment would be $1,464 a month. These estimates aren't fixed in stone; they're based on elaborate actuarial calculations that include assumptions that you will continue to earn about the same annual income you made during the last couple of years, and that your life expectancy will be somewhere around what they expect it to be (the current national average is about 77 years). If we do the math based on living to 77, we get the following total payout over the years we draw out, which does not include any interest that could be earned with that money: Retire at 62: $140,400 ($780/month x 180 months). Retire at 66: $142,560 ($1,080/month x 132 months). Retire at 70: $122,976 ($1,464/month x 84 months). That's right, despite the rather large discrepancy in the monthly benefit estimates, if you live the average lifespan, you may be better off retiring earlier; especially if you think you can invest the money at a better return than Social Security estimates it will make, at the Treasury-bond rate. "Actuarially, the government figures it out so it all works out the same; they're not trying to push people to take it out early, or to take it out late," says Michael Boone, CEO and charter financial analyst at M.W. Boone. "There are two issues here: They're assuming you're average, and they're assuming their rate of return. The question you have to ask yourself is: Are you average, and what could you actually do with the money if you got it earlier?"