Social Security: When to Collect Benefits Confuses Current, Future Retirees

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Retirees will see a 3.6 percent increase in their Social Security checks next year, but choosing when to receive benefits remains a complicated question where missteps can be costly, especially for two-income couples.

Over 60 million people will gain from the "cost of living adjustment," or COLA Social Security increase. The increase, designed to offset rises in the cost of living, was based on the Consumer Price index from the third quarter of 2008 through the third quarter of 2011, the Social Security Administration announced Wednesday.

Raising the Social Security full retirement age has been debated by lawmakers for years. For now, people can start receiving benefits as early as age 62 or as late as age 70, but the full retirement age--when benefits are at their maximum--ranges from 65 to 67 depending on when you were born.

All current retirees will get increases of about $39 a month and in December, those who receive supplementary Security Income, a disability program for the poor, will receive an average increase of $18 a month. The increase also applies to those who are at least 60 years old by Jan. 1.

Bill Reichenstein, a finance professor at Baylor University, said the increase will not affect people who are younger than 60 at end of year. Rather, their benefits will be based on a formula that translates their pay in their 35 highest earning years into a "primary insurance amount." Earnings for years before they turn 60 are adjusted for the average wage level in the country.

"If someone born in 1952 earned $40,000 in 1980 and the average US wage level doubled between 1980 and 2012 -- the year he or she turns 60 -- then the $40,000 would be doubled in the formula," Reichenstein said.

Those who must choose when to receive their Social Security benefits, which increase the later you receive them, face a complicated decision. For married people, the question is even more vexing.

Ted Schwartz, president and chief investment officer of Capstone Investment Financial Group and personal finance columnist, said the most difficult aspect of choosing when to receive Social Security benefits is estimating your longevity.

"That's what makes it a hard decision," Schwartz said. "If a person has great genetics and great health maybe putting it off is a better decision."

Reichenstein, 59, launched a paid tool on the website SocialSecuritySolutions.com six months ago which advises users on the best time to start receiving benefits.

He said he found a need for the tool because most Social Security Administration staff are not trained to offer the kind of advice that many people need, mainly the timing of your benefits.

"[Social security] rules are complex and not simple," Reichenstein said. "I've spent hundreds of hours working on scenarios and spreadsheets. One cannot do this without months and months of training."

His tool can provide a report to a user in a "matter of minutes," and has a three-tier pricing system of about $20, $50 and $125 depending on how detailed of a report you choose and whether you want to speak to a "live expert."

Reichenstein said he used the tool and decided to delay his benefits until age 70, in consideration of his wife, who is six years younger. Because he is the higher-income earner, her benefits will cease when he dies.

"The key principle is the higher-earning spouse," he said. "My benefits will last until the last of us die. Her benefits will last until the first spouse dies and it doesn't matter which."

Reichenstein said he is healthy but has a family history of cancer and expects to live until he is about 82, based on his heredity. To maximize Social Security's payout, he said he needs to wait until he is 70 until he starts to receive benefits.

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