The Social Security program in the United States is one of the world's largest government programs. The program pays out hundreds of billions of dollars each year in retirement income, disability income, and death and survivorship benefits. According to the Social Security Administration, nearly 55 million Americans will receive $727 billion in Social Security benefits in 2011. The recent economic crisis has devastated retirement savings and resulted in a greater dependence on Social Security retirement benefits.

Twenty two percent of married couples and 43% of unmarried people now rely on Social Security for at least 90% of their income during retirement. With so many individuals and couples depending on Social Security to pay the bills during retirement, it is important to number crunch and to understand how age affects benefits when determining the best time to start receiving benefits. (If you're dependent on Social Security, check out how to Maximize Your Social Security Benefits.)

TUTORIAL: Retirement Planning

When Is the Normal Retirement Age?
An individual's normal retirement age depends on when he or she was born, as the chart below illustrates:

For individuals born in … The normal retirement age is …
1937 or earlier 65
1938 65 and 2 months
1939 65 and 4 months
1940 65 and 6 months
1941 65 and 8 months
1942 65 and 10 months
1943 – 1954 66
1955 66 and 2 months
1956 66 and 4 months
1957 66 and 6 months
1958 66 and 8 months
1959 66 and 10 months
1960 or later 67

Three Alternatives
People have three alternatives when deciding the best time to start receiving Social Security benefits. They can take them early, wait until the normal retirement age or wait even longer. The longer an individual waits to start receiving benefits, the larger the monthly check will be.

Take Benefits Early
The earliest a person can start receiving Social Security retirement benefits is 62. More than 66% of eligible workers take Social Security retirement benefits early even though many would be better off financially by delaying benefits. People who choose to take benefits early (before the normal retirement age) will be penalized: the benefit is reduced by five-ninths of 1% for every month before the normal retirement age is reached, up to 36 months.

When benefits are started more than 36 months prior to normal retirement age, the benefit is further reduced by five-twelfths of 1% each month. If your full retirement age is 67, as it is for any individual born in or after 1960, the approximate reduction for starting benefits early would be:

Age Reduction
62 30%
63 25%
64 20%
65 13.3%
66 6.66%

Wait Until the Normal Retirement Age
Individuals who wait until normal retirement age will receive full Social Security retirement benefits. The amount of the monthly benefit is calculated by averaging the earnings from the 35 highest income-generating years. In addition to receiving full benefits, individuals who wait until normal retirement age to collect benefits may continue working and receiving wages without impacting Social Security retirement benefits. Social Security benefits may be reduced for those who elect to take benefits before normal retirement age and who remain active in the workforce. (To help determine how much social security you will receive, read How Much Social Security Will You Get?)

Wait Until After the Normal Retirement Age
Delaying benefits until after normal retirement age will earn a credit and result in a larger monthly check. With delayed retirement credits, an individual will receive the largest benefit by retiring at age 70. The annual delayed retirement credit percentage varies from 3-8% depending on the person's year of birth. For those born in or after 1943, waiting one extra year would increase the yearly benefit by 8% or two-thirds of 1% monthly.

Considerations
People who elect to begin receiving Social Security benefits prior to the normal retirement age will have reduced benefits, but will receive benefits for a longer time. If you wait until normal retirement age or beyond, the checks will be larger, but you will receive fewer checks. The Social Security Administration's website has several calculators and a retirement estimator (www.ssa.gov/estimator) to help people determine the best time to start receiving benefits. An individuals should also consider his or her:

  • Health and life expectancy
  • Current cash needs
  • Anticipated future financial needs
  • Current employment status
  • Other income streams
  • Spouse's Social Security

The Social Security Administration reminds us that regardless of when one elects to start taking advantage of Social Security benefits, everyone should sign up for Medicare three months before reaching age 65 to avoid delayed coverage or increased rates.

The Bottom Line
Deciding when to start taking Social Security is a difficult personal decision that must be based on factors like current cash needs, employment status and how long one expects to live. Because there are so many what-ifs, careful number crunching examining the different scenarios must be performed to determine the most practical and advantageous age at which to take benefits. The Social Security Administration's website has a host of helpful information, tools and calculators. Qualified financial and retirement planners can also assist individuals and couples in making these important decisions to maximize Social Security benefits. (To help you determine when to retire, see Retiring Early: How Long Should You Wait?)

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