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Q&A: "When Does it Make Most Sense for Me to Start Collecting Social Security?"

Social Security

Question and background: 

When does it make most sense for me to start collecting social security? I will be 62 in October 2014. I stopped working 1/1/2014 and wondered if I should apply for SS retirement benefits at 62 or wait until 66. If I receive benefits at 62 I will receive $1,004 per month. If I wait until I am 66 I would receive $1,331 per month. My net worth including house, car, investments etc. is $1,400,000. Thank you.

Larry's answer: 

Deciding when to collect social security should be part of your broader retirement planning and should include factors like these:

  • What are your anticipated spending needs in retirement?
  • How is your health with respect to life expectancy? Do you have longevity in the family genes?
  • Do you have income streams in addition to your net worth such as a pension or payout annuity?
  • How much of your $1.4 million net worth is easily accessible to fund your retirement?
  • Could you reduce your overall income taxes over your remaining lifetime by taking taxable withdrawals now from tax-deferred retirement accounts (IRA, for example) and delaying your social security until the benefit is larger? It would reduce your Required Minimum Distributions at age 70.5, plus not all of your social security benefits will be considered taxable income.
  • Are you married? And if so, is your spouse's social security benefit larger or smaller than yours? A surviving spouse will receive the larger social security benefit of the couple.

Having said that, if you draw social security before your Full Retirement Age (FRA) of 66, you'll permanently lock-in a reduced benefit. But if you wait until age 70 to collect, you'll receive about $1,757 (today's $). That's 132% of your age 66 benefit.

In other words, you'd receive a guaranteed "return" of about 8% per year between age 66 and 70, plus you'll receive the future cost-of-living increases. Nowhere in the current environment will you find a similar opportunity...effectively, it's the best "annuity" out there right now. 

I'd encourage you to hire an advisor who (genuinely) specializes in retirement income and withdrawal strategies, who'll run projections that include these factors and help you analyze what's best for you. You owe it to yourself to fully understand your financial picture before locking-in such a critical decision as when to collect social security.

Hope that helps. All the best!