When Should You Collect Social Security?

Forget about your investments for a moment. Yes, I know, your portfolio has lost more than 30 percent in a year, but chances are there's another critical financial issue that you've spent a whole lot less time thinking about.

That is when and how you will collect Social Security retirement benefits.

Make the wrong choice, and you could lock yourself into 30 years of reduced income. Make the right choice, and you could more than make up for what you've lost in the past year's market turmoil.

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The simple fact is most Americans start collecting Social Security retirement benefits at far too young an age. The typical American begins collecting within one of year of turning 62, the earliest age possible.

By doing so, these early retirees settle for a monthly benefit that right now is 25 percent less than what they would receive at their full retirement age (currently 66). For today's recipient eligible for the maximum monthly benefit, that's the difference between $19,665 and $26,220 a year.

Wait until age 70, and the difference is even greater: $19,665 at 62 and $35,672 at age 70. (All figures are in today's dollars.)

The cynics rightly point out that recent projections show the Social Security Trust Fund will be exhausted in 2037. But even without any changes in the system before then, current Social Security tax payments will be able to fund benefits at reduced levels.

I happen to believe that by 2037 there will be some type of fix in place even if the political courage to do so now is lacking.

In general, the longer you can wait to collect Social Security, the better off you will be, particularly if you are in good health and stand a decent chance of living into your 90s.

That said Social Security is not a one-size-fits-all program. When and how you should begin collecting will differ with your circumstances, including your health, income, net worth, marital status and spouse's age and work history.

Retirement and Social Security

Factoring in all of these issues can make for a complicated decision as you approach your retirement years. That's why I say anyone in their 50s or older should learn more about how Social Security works and start thinking about what's the best way to maximize their retirement income.

In recent years, academic studies have highlighted several ways for eligible recipients to maximize benefits. One strategy involves paying back to the Social Security administration what someone began collecting at age 62 to qualify for a higher monthly benefit based on an older starting age.

A second strategy for married couples suggests maximizing the couple's joint benefits by claiming a wife's Social Security benefits at an early age and then delaying the husband's collection of benefits until beyond his full retirement age.

The Center for Retirement Research at Boston College outlined another strategy in a recently published paper entitled "Strange But True: Claim Social Security Now, Claim More Later."

It explains how married individuals can benefit from provisions that allow them to collect either a "retired worker benefit" based on their own earnings and/or a "spousal benefit" equal to one half of their spouse full retirement age benefit.

Before full retirement age -- now between ages 62 and 66 -- the Social Security Administration awards an individual whichever benefit is higher. But upon reaching full retirement age, individuals can choose which to receive. This means married individuals can claim a spousal benefit at age 66 and then switch to their own retired worker benefit at a later date.

"This approach allows a worker to begin claiming one type of benefit while still building up delayed retirement credits, which will result in a higher benefit later," explains the paper, which was published in April. Its authors are Alicia M. Munnell, Alex Golub-Sass and Nadia Karamcheva.

Those likely to benefit most from this approach are husbands in two-earner couples. In most cases, the paper explains, the optimal strategy is for a wife to begin collecting Social Security at age 62 as the first step.

Spouses Benefit

The second step would have the husband claim the spousal benefit based on his wife's earnings when he turns 66.

Then, in a third step at age 69, he would claim a higher retired worker benefit due to the delayed retirement credits for waiting beyond age 66, and stop receiving the spousal benefit he had been collecting.

If the woman is the higher earner within the couple, the roles would be reversed.

The paper's authors explain that for this strategy to work the individuals must be married, at least one of them healthy enough delay claiming until 66 and both spouses must have an earnings history.

"The higher and the more equal the earnings records, the more to gain," the authors note.

This is only a quick summary of the "Claim Now, Claim More Later" strategy. I offer it only as example of why it's a good idea to learn more about how Social Security benefits work and to think carefully before you begin collecting.

To learn more, visit the Center for Retirement Research at http://crr.bc.edu/. Also, be sure to visit early and often the Social Security Administration Web site, www.socialsecurity.gov.

This work is the opinion of the columnist and in no way reflects the opinion of ABC News.

David McPherson is founder and principal of Four Ponds Financial Planning in Falmouth, Mass. He previously worked as a financial writer and editor for The Providence Journal in Rhode Island. He is a member of the Garrett Planning Network, whose members provide financial advice to clients on an hourly, as-needed basis. Contact McPherson at david@fourpondsfinancial.com.

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