Tuesday, June 12, 2007

Delayed Gratification

According to the Social Security Administration about 50% of retirees claim social security benefits as soon as they become eligible. Yet benefits are reduced from 5.5% to 6.5% for each year you take benefits before your normal retirement age, which is currently between age 65 and 67 depending on your date of birth.

For anyone who is still working it makes little sense to begin collecting benefits early. Working claimants will loose $1 of benefit for every $2 earned above $12,960. In many cases this could wipe out the benefits altogether. So if you continue to work you should think twice about taking benefits at age 62.

Because social security benefits are based on age but ignore gender, and women tend to have longer life expectancies than men, it normally would make sense for females to claim benefits as soon as possible, but again if you plan to work beyond 62 you should carefully examine if delaying benefits will result in higher net income.

At age 70 social security benefits reach their maximum so there is no point in delaying beyond that point. So the real question for those who continue to work is whether to claim benefits between normal retirement and age 70. A good way to judge when to claim benefits is to compare the cost of buying an immediate annuity to provide this same income over a single life expectancy. Insurance companies are great actuaries, so this method can show you the present value of future benefits at various ages. Many web sites can provide immediate quotes for this type of annuity, allowing you to make a comparison of benefits quickly and privately.

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