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When Should You Collect Social Security?

One of the biggest decisions that a retiree makes is determining the age at which to claim Social Security benefits. Some people need their benefits as soon as they are eligible, at age 62, while others elect to wait until age 65 or even age 70. More than 60% of Americans claim their benefits early (before full retirement age).

Social Security benefits claimed as early as age 62 are reduced by a fractional percentage for each month that they are received before "normal retirement age." Normal retirement age used to be age 65 but is gradually increasing in two-month increments and will be age 66 for people born between 1943 and 1954 and age 67 for those born in 1960 or later.

In Social Security lingo, the key factor that determines monthly benefits is the Primary Insurance Amount or PIA. All benefits, including those to a widowed spouse, are based upon a worker's PIA. Simply put, the PIA is the monthly benefit payable to a worker at his or her normal retirement age. The PIA is determined by a formula, which is applied to an average of a worker's highest 35 years of earnings indexed for inflation. If a worker has less than 35 years of earnings, there will be zeros in this calculation that will lower the monthly benefit.

At their normal retirement age, fully insured beneficiaries receive benefits equal to their PIA. If benefits are taken at age 62, there is a permanent reduction in the amount received. Should you elect to take a permanently reduced benefit? Many factors need to be considered before making this decision, including the need for Social Security income, other sources of retirement income, health status, expected longevity, plans to work during retirement (there are earnings limits for beneficiaries between ages 62 and 64), and other resources (e.g., life insurance with benefits for your spouse).

It is possible to mathematically calculate your odds of making the "right" decision. A key number is your break-even age, which is the age at which the higher benefits received for delaying Social Security beyond age 62 exceed the amount that you would have received by claiming benefits early. Research indicates that it takes about 13 years for an age 65 Social Security beneficiary to accumulate the same payout as someone who started receiving benefits at age 62. Thus, a person would need to live until their late 70s to come out ahead. Since average life expectancy is 79 for men and 84 for women, some later retirees will die before breaking even.

Spouses of workers eligible for Social Security, who have worked outside the home, have a choice on how to receive Social Security benefits. They can receive the larger of either a benefit based on their own work record or one based on the record of their employed spouse. Approximately 36% of women, for example, draw benefits based on their own work record.

At his or her normal retirement age, a husband or wife (the laws are gender neutral) will receive 50 percent of a spouse's PIA. Payments to a spouse can begin before normal retirement age, as early as age 62, but, again, will be reduced by a fractional percentage per month. Decisions that a worker makes about receipt of Social Security benefits also affect his or her spouse. If reduced benefits are taken early and a surviving spouse has few resources to live on, he or she will likely struggle financially.

If a worker delays receipt of Social Security benefits beyond normal retirement age, benefits are increased for each month that benefits are not received between ages 65 and 69. Someone eligible for a $1,660 benefit in 2002 would receive $2,200 by waiting to age 70, for example. Less than 2% of Social Security beneficiaries wait until age 70, however.

For additional information about the specifics of Social Security regulations, call 1-800-772-1213, or visit the Web site www.ssa.gov. Also be sure to review your annual benefit estimate form, which is sent about three months before your birthday.