At 62, boomers must weigh factors in timing benefits

Some things to consider

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Social Security replaces about 40 percent of an average wage earner's income during retirement. Most financial advisers estimate that retirees will need about 70 percent or more of their pre-retirement earnings to live comfortably. Pensions, investments and savings have to bear some of the burden. Other facts about Social Security:

• In 2008, more than 50 million Americans will receive nearly $614 billion in benefits.

• It is the major source of income for most of the nation's elderly.

• Nine out of 10 people age 65 and older receive benefits.

• Among elderly beneficiaries, 52 percent of married couples and 72 percent of unmarried people receive 50 percent or more of their income from Social Security.

• Among elderly beneficiaries, 20 percent of married couples and about 41 percent of unmarried persons rely on Social Security for 90 percent or more of their income.

• Retired workers and their dependents account for 69 percent of total benefits paid. Disabled workers and their dependents account for 18 percent of total benefits paid.

• Survivors of deceased workers account for 13 percent of total benefits paid.

• An estimated 164 million workers, 96 percent of all workers, are covered.

• 52 percent of the work force has no private pension coverage.

• 31 percent of the work force has no savings set aside specifically for retirement.

• By 2034, there will be almost twice as many older Americans as there are today — 74 million, compared with 38.6 million.

• There are currently 3.3 workers for each beneficiary. By 2034, there will be 2.1 workers for each beneficiary.

Source: Social Security Administration

Retire at 62 and start collecting Social Security benefits.

Sounds simple, right?

Well, not so fast.

Deciding when to collect Social Security benefits requires planning and coordination as retirees decide how best to draw from investments and savings like 401(k) plans, individual retirement accounts and certificates of deposit.

Some financial planners recommend taking benefits as early as possible; others suggest working longer in order to receive higher monthly payments later in life, particularly as people live longer and costs of medical care increase.

These and other considerations are likely to be on the minds of many older Americans as the first wave of nearly 80 million baby boomers turns 62 this year.

One financial planner, Mary Pat Heck of MP Financial Innovations in Omaha, said people who quit working at 62 find it hard to not start claiming benefits then.

If people continue to work after age 62 but elect to receive Social Security, their benefits are reduced by $1 for every $2 earned above an annual limit, which in 2008 is $13,560. After full retirement age (66 or 67, depending on the year you were born), Social Security benefits are not reduced no matter how much is earned through working.

Officials with the Social Security Administration noted that monthly payments would increase at full retirement age to take into account any benefits that were withheld because of work wages.

A financial planner in Lenexa, Kan., Shane Barber of Barber Financial Group, said people generally should collect Social Security as soon as they can. That allows investments such as 401(k) and individual retirement accounts to continue growing, and they would grow faster than money kept in the Social Security system, Barber said.

"If you semiretire at age 62 and if you're taking Social Security benefits, that is money you don't have to pull from retirement assets," Barber said. "You'll be money ahead by taking it early."

Social Security officials say that people who live to average life expectancy generally will receive about the same amount in lifetime benefits whether they start receiving payments at age 62, at full retirement age, at age 70 or any age in between. Beyond age 70, there is no increase in benefits.

People are living longer than ever, and you don't want to run out of money before you die, Social Security officials say. One of every four 65-year-olds today will live past age 90, and one of 10 will live past age 95, according to a pamphlet titled "When To Start Receiving Retirement Benefits."

"You will want to choose a retirement age based on your circumstances, so you will have sufficient income when you need it," the pamphlet states.

Steve Morris, a financial planner in Lincoln, said he works with many clients for whom Social Security is a major part of their planning.

"You just have to plug in those different scenarios" to see which best fits a given situation, Morris said.

In July, the Social Security Administration's Web site at www.ssa.gov began offering a personalized online calculator of retirement benefits. People can type in their information, and Social Security computers use personal information the agency has on record to provide a variety of scenarios to estimate what they might expect to receive.

The Web site also offers a "break-even" calculator that helps people determine how old they would be when the accumulated value of higher benefits from postponing retirement exceeds the value of taking lower benefits under early retirement.

For example, someone retiring at age 62 and drawing a benefit of $1,125 a month and someone retiring at age 66 and collecting $1,500 a month would collect the same amount of money by the time each was 78. Under this scenario, the 62-year-old living beyond age 78 would have been financially better off postponing benefits.

Then there are spousal considerations.

If one spouse is younger and has earned significantly less than the other, the older spouse might want to wait until full retirement age or even age 70 to receive benefits. If Social Security benefits were received before full retirement age and the older spouse died, the surviving husband or wife would continue receiving the lower monthly payments.

And here is another, little-known wrinkle: Retirees can collect Social Security beginning at age 62 — and then at full retirement age or at age 70 pay back all they had received to that point.

Under this option, people use Social Security form 521, asking to withdraw their application for Social Security benefits, and then they reapply for benefits at higher monthly payments.

The option has been available at least since the 1940s. Reasons for using it have included going back to work after taking early retirement, said John Garlinger, regional communications director for the Social Security Administration in Kansas City, Mo.

"It's sort of like a 'mulligan,'" Garlinger said. "It's a do-over."

Of 31.5 million retired workers, 230 people used form 521 last fiscal year and 71 people used it in the first seven months of this fiscal year, Garlinger said.

An economics professor at Boston University, Laurence J. Kotlikoff, said postponing retirement or taking advantage of withdrawal and reinstatement could improve many people's standard of living, particularly as they live longer and the cost of medical care increases.

The 521 strategy would be similar to buying an inexpensive, inflation-indexed annuity, Kotlikoff said. If the option is used, no interest is charged on benefits already received that must be paid back and any income taxes paid on the benefits can be taken as a tax credit, Kotlikoff said.

There are factors to consider, including properly calculating what you owe Social Security and coming up with the cash to pay back tens of thousands of dollars of benefits already received.

"If you are really strapped for money, this is not a good idea," Kotlikoff said.

Barber of Barber Financial Group in Lenexa said money earned through other investments could be used to pay back the agency.

"The fact most people don't know about this rule is why people talk about a 'break-even' point — should I take it early or should I wait," Barber said. "But if you have the ability to take advantage of the rule, you can have your cake and eat it, too."

• Contact the writer: 444-1117, joe.ruff@owh.com