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Social Security: Take it early, on-time, or late

Question: I retired a year and a half ago and have been living on a severance payment since then. Sometime in the next few months, as I expected, I will need to supplement that with other funds. I will be 62 in Feb. and could begin to draw social security early. Or, I could begin to draw on a mutual fund account. Which makes more sense economically? (I'm married and my husband's retirement is paying about 2/3 of our living expenses.) My considerations are:

--I could draw social security now in order to get into the system now, since there is much talk about upping the age of full payments in the near future. I could then pay back Soc. Sec. later from other retirement funds in order to get the increased amount, but some suggest that that repayment option may disappear.

--I could draw on the mutual funds now, considering that the annual rate of social security payment rise between my age 62 and my age 67 might beat out the interest earned in the mutual fund account over that period. Thank you, Linda, Brimfield, MA

Answer: You're asking the right questions. The decisions about withdrawing money during retirement are never easy. There are so many "known unknowns" to use former Defense Secretary Donald Rumsfeld's wonderfully apt expression.

As you say, you'll receive a lower benefit than you would if you wait until your full retirement age or later. I think waiting is the best option for most people.

The return on the Social Security dollar from holding off until the full retirement age or even later is huge. Take someone with a normal retirement age of 66 but who doesn't take the benefit until age 68. The extra two years boosts the benefit by 16%. Conversely, if this same person applied at age 62 the total benefit reduction is 25%.

Put somewhat differently, who should consider taking Social Security early? A good candidate is anyone who has good reason to believe their health will deteriorate and they could die early in retirement. Everyone who has so little saved that they need Social Security to get by should also apply early. "Other than those exceptions, those who have saved enough will generally do better by starting social security at a later age," says Henry Hebeler, founder of Analyzenow.com

This is a good article on the trade-offs between taking Social Security early, at full retirement age, or later (until age 70).

There are a number of other major issues to consider besides life expectancy and savings. For instance, even though you're retired do you plan on earning money over the next several years? Many retirees work for social reasons and to supplement their income. The rules only allow you to earn a small amount of income before you lose $1 for every $2 earned. Once you reach your full retirement age, however, the earnings limitation is lifted. You can then continue to earn a decent income and receive full Social Security benefits. You'll stay pay taxes but the penalty for working is much less.

It's true that you have a potential "out" if you apply for Social Security at age 62 and then regret that choice later on. Under some circumstances, it pays to make a Social Security do-over. Once you've hit your full retirement age, you always have the option paying back the money you've received from Social Security--without penalty or interest--and start again at a higher value. However, the maneuver takes a lot of money at the time to accomplish.

Since I can only touch the surface of the issue, I have two recommendations for further research. Syndicated columnist Mark Miller has a good book out on retirement. It's The Hard Times Guide to Retirement Security: Practical Strategies for Money, Work, and Living. He thoughtfully guides you through all the key questions and issues for creating long-term financial security, including Social Security. It's practical and helpful with a lets-roll-up-the-sleeves attitude.

I would also spend a lot of time reading the Social Security articles and using the Social Security caculators at Analyzenow.com. The Social Security calculators are terrific.

Now, this is a forecast, but I wouldn't worry too much about another hike in the Social Security full retirement age. Yes, it will eventually happen. But it will take time to become law. For one thing, Washington is too dysfunctional to do anything quickly. (Washington knew years ago that the Bush-era tax cuts were going to expire by Dec. 31, 2010 and they wait until now to delay a decision for another two years!)

For another, it's likely that there will be a further delay before the change becomes effective. For example, Alan Simpson and Erskine Bowles, the heads of the U.S. debt reduction commission, recommended boosting the retirement age for Social Security to age 69 by 2075. The baby boom generation will be dead by then!

About the author

Chris Farrell is the economics editor of Marketplace Money.

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