BUSINESSWEEK ONLINE : JULY 17, 2000 ISSUE
COVER STORY

When to Collect
It may not pay to file for Social Security at age 65

Everyone planning for retirement knows it's critical to make informed decisions about when to withdraw assets from savings plans such as 401(k)s and IRAs. But perhaps because of an impulse to grab benefits as soon as possible, few bother to consider the best time to start collecting their monthly Social Security checks.

That's a mistake. Two out of three seniors rely on the Depression-era program for most of their retirement income. ''For large portions of the population, the decision about when to claim benefits is a very important one,'' says Social Security Administration Commissioner Kenneth Apfel. The decision about when to start taking benefits can mean the difference between getting the most out of the system--or leaving money on the table.

To get the full benefits calculated on your lifetime earnings, you must wait until you turn 65. But you can start collecting a reduced amount as early as age 62. The reduction is permanent: You'll collect less every year for the rest of your life than you would if you waited until your full retirement age to start getting checks. But the amount is calculated so that if you reach the average life expectancy, you'll receive the same total lifetime benefit whether you start your benefits at 62, 63, 64, or 65.

PLACE YOUR BET. Until this year, those retiring at 62 took a 20% hit. But a new schedule takes effect this year, the result of congressional efforts to shore up Social Security funding. Under this new plan, retiring at age 62 will cost you 20.83%--a bite that will climb, in stages, to 30% by 2022. Those choosing to retire at 63 or 64 will take proportionally smaller reductions relative to those retiring at 65. Under the same new policy, the full retirement age is rising this year to 65 and 2 months, and will keep climbing to age 67 by 2022 (table).

Those entitled to Social Security payouts face a series of choices. For example, a 62-year-old who garners the maximum benefit, based on wages earned over a 35-year career, must consider whether it's better to take $1,248 a month now, $1,767 a month starting at age 65, or a larger sum starting later.

Since the benefits are based on average life expectancy, arriving at an answer requires betting on your longevity. Those who die young are better off if they take their checks early. Centenarians, on the other hand, come out ahead if they wait for a larger benefit.

The consequences of miscalculating can be dire, as any 90-year-old trying to make ends meet on a permanently reduced monthly check can testify. ''If everyone started retiring at age 62, about 700,000 more seniors would be living in poverty sometime later in their lives--and the majority would be widows,'' Apfel says. Indeed, many of today's recipients will live long enough to regret their decision. That's because almost 70% of those receiving retirement benefits took them early---a move that will pay off if they die before reaching the average life expectancy. But by definition only half will die before reaching that age. So some 20% of the recipients will be drawing a permanently reduced benefit in their old age.

To find the average life expectancy for your birth year, go to the Social Security Administration's Web site at www.ssa.gov/search/index.htm, enter ''life expectancy'' and click on ''Life Expectancy for Social Security.'' But before making a wager on your life span, consider your family's medical history as well as your own health. And don't forget to factor in your spouse's likely longevity if he or she stands to inherit some or all of your benefits.

Calculations performed at the Social Security Administration's Web site (www.ssa.gov/retire/calculators.htm) can give you an idea of what you should expect to receive per month beginning at a variety of ages. If you go to www.ssa.gov/retire/walkthru.htm or call 800 772-1213, you can also get an estimate, based on your earnings history, of your benefits at 62, at full retirement age, and at 70. The benefits estimate is based on an extrapolation of your work history. If you expect your future earnings to change significantly, you can use the Web calculators to incorporate them in the benefits estimate.

You can boost your Social Security check even more by putting off collecting beyond age 65. But a quirk in the Social Security system probably makes that a bad move. That's because those who wait are currently compensated with a payout increase of only 6% per year on top of an annual cost-of-living adjustment. Suppose a 65-year-old man entitled to the average monthly payment of $1,066 decides to postpone collecting until age 70, when he would get about $1,425 per month. He would have to live until at least 85 to make up the benefits he did not collect between 65 and 70. Since his life expectancy is about 81, that's a bad bet--unless his family's history or his own good health make him think he'll live longer.

STAYING AT WORK. In 2008, this anomaly will be remedied. That's when the annual ''credit'' for postponing the start of your claim rises to 8% for those born after 1942. Then, says Alicia Munnell, a professor at Boston College's Carroll School of Management and an expert on Social Security, ''it shouldn't make any difference'' whether someone with an average life span starts receiving checks at 62 or 70. In any case, you can't boost your initial benefit any further after age 70--so there's no point in postponing beyond that age.

Because the benefits formula averages each person's 35 highest years of earnings, continuing to work pays off for some people. And thanks to a law that Congress passed this year, workers above full retirement age are no longer subject to limits on what they can earn while receiving benefits.

Despite the drawbacks of early payouts, you might wind up ahead financially by taking it as soon as you can. If you think you can earn a higher return than the long-term Treasury rate, take the money as soon as possible and invest it. Before calling your broker, though, ask yourself whether you are comfortable with the volatility and uncertainty of the stock market, says David Bugen, a principal at Bugen Stuart Korn & Cordaro, a Chatham (N.J.) wealth-management firm. If you can stomach the market's ups and downs, you might set yourself up for a more secure retirement.

By ANNE TERGESEN

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