Social Security For Dummies. Jonathan Peterson

claiming (up to age 70) after reaching full retirement age. Check out Table 3-2 for the numbers.

TABLE 3-2 Increase for Delayed Retirement

Year of Birth*	Yearly Rate of Increase	Monthly Rate of Increase
1933–1934	5.5 percent	of 1 percent
1935–1936	6.0 percent	½ of 1 percent
1937–1938	6.5 percent	of 1 percent
1939–1940	7.0 percent	of 1 percent
1941–1942	7.5 percent	5⁄8 of 1 percent
1943 or later	8.0 percent	2⁄3 of 1 percent

       * If you were born on January 1, refer to the previous year.

      USING YOUR NEST EGG TO DELAY CLAIMING

      If you’re fortunate enough to have a nest egg and you want to retire, you can consider withdrawing more savings up front as a way to hold off starting your Social Security benefit. But does the strategy make sense? It well may, and there are some important things to keep in mind.

      Social Security benefits go up about 7 percent for each year they are not claimed between age 62 and your full retirement age. Wait longer and the reward grows even more: Benefits increase 8 percent annually for each year they are not claimed between full retirement age and 70.

      Are your financial resources adequate to support your lifestyle without Social Security, so you can delay claiming and lock in the income gains I just described? The issue can get complicated, and those interested may want to talk it over with a financial advisor. Among the considerations are the following:

       The tax bite: A portion of your Social Security benefit may be subject to income tax (though at least 15 percent is tax free for everyone). Withdrawals from (non-Roth) Individual Retirement Accounts will surely have tax implications. But some research has shown that withdrawing more up front may reduce the tax bite later. Check your situation with an expert.

       Family income: Is your spouse eligible for Social Security based on his or her work record? This increases your options. Just know that your total income may affect whether your Social Security benefits are subject to income tax, how much, and whether it makes sense to delay claiming. (See Chapter 13 for a discussion of income tax rules and Social Security, including provisional income.)

       Your investments: Consider reasonable rates of return, including your appetite for risk, in weighing the pros and cons of delaying a claim for Social Security. It’s extremely difficult to beat Social Security’s guaranteed returns.

      Finally, a note of caution (and common sense): If your nest egg is modest, the strategy of withdrawing savings to delay Social Security may be unwise, because it’s important to have a cushion. Be realistic when calculating how much of a cushion you need.

Looking at Life Expectancy When You Claim Benefits

      When figuring out how much to reduce people’s benefits if they take the benefits early, the SSA considered average longevity. But you could live a lot longer than average — and that makes your decision on when to claim benefits that much more important.

      No one can predict exactly how long you’ll live. You should also consider how old your parents lived to be and your personal health, including chronic conditions that may shorten your life span.

      

You can use an online calculator to assess your life expectancy. Go to www.livingto100.com and click on “Take the Calculator” or take the Longevity Test at www.bluezones.com, and you’ll be given an estimate. The Longevity Illustrator, developed by the American Academy of Actuaries and the Society of Actuaries, highlights how long you might live at different ages of retirement; visit www.longevityillustrator.org.

      In the following sections, I cover two topics related to longevity and Social Security: completing a break-even analysis and handling the possibility of exceeding your projected life expectancy. Neither is as complicated as it sounds.

      Doing a break-even analysis: The payoff from different retirement dates

A break-even analysis compares what you get in your lifetime if you pick different dates to collect Social Security. It’s a way to estimate your total payoff from retiring at an earlier date (with reduced monthly payments) and retiring at a later date (with higher monthly payments). This approach gets some criticism, because it can lead to a costly decision if you end up living longer than expected. Factors such as your health and other financial resources also should be weighed in deciding when it makes the most sense to claim retirement benefits.

      But I also know that many people care — understandably! — how much Social Security they may get in a lifetime. In general, if you die before reaching the break-even age, and you started collecting benefits at the earlier date, you come out ahead. If you live beyond your break-even age but started benefits at the later date, you also come out ahead, because those bigger payments add up over time. Where you lose out is if you die before reaching the break-even age (and you started collecting larger benefits at the later date) or if you die after your break-even age (and you started smaller benefits at the earlier date).

      The break-even approach is a common tool recommended by financial planners, and it can provide perspective. But it’s just one consideration. The more you care about how your benefits add up over a lifetime, the greater weight you may give a break-even calculation. The more you care about ending up with the biggest monthly benefit, the greater weight you may give to delaying your claim for Social Security.

      

Your break-even age will vary based on your earnings record and date of birth, but estimating it isn’t too difficult. Here’s how to compare how you’ll come out over your lifetime if you start benefits at age 62 versus your full retirement age:

      1 Determine your full retirement age (refer to Table 3-1).For example, say your full retirement age is 66.

      2 Determine your full retirement benefit at that retirement age by going to www.ssa.gov/estimator.For example, say your full retirement benefit at 66 is $1,500 per month. (Note: