Every year, millions of near-retirees have to make a crucial decision: when to start taking their Social Security benefits. Although making the wrong choice can cost you and your family thousands of dollars over your lifetime, don't panic -- thinking through your options will help you figure out the right thing to do.

To wait or not to wait
The age at which you start taking benefits is the biggest factor in determining how big your checks will be. Using your salary history over your career, Social Security will calculate a base monthly payment for your monthly check. That's the amount you'll receive if you retire at your normal retirement age -- 66 for those born between 1943 and 1954, increasing to 67 for those born in or after 1960.

However, you have the option to take benefits as early as age 62 or as late as age 70. If you wait past your normal retirement age, you'll get a bonus added to your monthly benefit -- as much as 8% extra for every year that you wait. On the other hand, if you choose to take your benefits early, you'll get penalized: Your monthly check will be as much as 25% smaller.

The value of starting early
At first, you might believe that waiting as long as possible before taking Social Security is the best move. After all, as soon as you start getting your monthly checks, you've locked in your benefit amount for the rest of your life. If delaying even a short time can add hundreds of dollars to your income each month, it seems it should be worth it.

For instance, say you're 61, make $50,000 a year, and are considering when to start taking Social Security. We'll also assume that inflation increases your benefits by 3% each year. Your Social Security statement shows that if you take benefits at age 62, you'll receive $1,016 per month. Waiting until age 66 would give you $1,533 per month, and if you can wait until age 70, you'd get $2,424 monthly.

In terms of total dollars paid, waiting pays off fairly quickly. If you wait until age 66 to take benefits, you'll have gotten more dollars from Social Security by the time you turn 76. Waiting until age 70, you'll pass up earlier recipients at age 78.

Don't forget income
But that doesn't include what you can do with that money once it's in your hands. If you don't need that money to survive, you can invest it -- and that's where the value of an early payout comes in.

If you earn even a modest return on that money -- say 4%, which you can earn on CDs right now -- the math changes a bit. Those retiring at normal retirement age now don't catch up with early retirees until they're 79.

Investing your benefits in higher-return investments like stocks makes early benefits even more attractive. Consider a portfolio of some of the top stocks in the S&P 500:


10-Year Total Return

ExxonMobil (NYSE:XOM)


General Electric (NYSE:GE)


Wal-Mart (NYSE:WMT)




Schlumberger (NYSE:SLB)


Johnson & Johnson (NYSE:JNJ)




Average 10-Year Total Return:


Annualized Return:


Source: Yahoo! Finance.

If you take early Social Security benefits and earn an 8.9% return by investing your benefit checks, you'll be ahead of those who take normal retirement until you're 90 years old. Even with longer life expectancies, many people will end up way ahead taking money earlier.

Going beyond the simple
The example shows that if you only had to worry about yourself, taking early benefits is often best. But there are other things to consider:

  • If you still work at age 62 and take early benefits, the amount you receive may be reduced.
  • For many recipients, Social Security benefits are subject to tax. So what looks like a good move may not be, once you take taxes into account.
  • Benefits for your spouse and children are also based on when you retire. If you take what they'll receive into account, you might be better off waiting to get a higher benefit.
  • You may get more by claiming spousal benefits based on your spouse's work history than by using your own earnings.

You'll find a lot more information about making decisions about Social Security in our Rule Your Retirement service. A series of back issues from about a year ago discuss all the variables involved in choosing to take benefits -- including one strategy that may give you the best of both worlds. Intrigued? A 30-day trial gives you full access to this and other useful information you need to know about your retirement -- and it's absolutely free.

More on investing for a secure retirement:

Fool contributor Dan Caplinger just hopes he'll get any Social Security at all. He owns shares of General Electric. Johnson & Johnson is a Motley Fool Income Investor pick. Wal-Mart is a Motley Fool Inside Value recommendation. Try any of our Foolish newsletters services free for 30 days. The Fool's disclosure policy shows up fashionably early.