One of the toughest questions you have to answer as you approach retirement is when to start taking Social Security. After a recent change disallowed an interesting no-lose strategy, making the right decision is more important than ever -- and could mean thousands of extra dollars for your retirement nest egg.
What's at stake
Unlike Medicare, for which most people become eligible at age 65, Social Security gives you a wide range of options for starting to receive benefits. The benchmark figure for your Social Security payment assumes that you wait until your normal retirement age -- 66 years old for those born between 1943 and 1954 -- before electing to start getting monthly payments.
But you have the flexibility of an eight-year window in deciding exactly when you want benefits to start. With the option of getting benefits as early as age 62, you can start the Social Security cash flow years before your normal retirement age. But doing so will cost you about 6% per year off your monthly benefit -- or a full 25% discount from your payment if you take Social Security right on your 62nd birthday.
In contrast, you can also push benefits off beyond your normal retirement age. If you do that, you can receive extra benefits -- up to 32% more, if you defer from age 66 to the maximum deferral age of 70.
No more cake
Until recently, a little-known provision gave retirees a chance to get a do-over on their benefit decision. Under the provision, you could take benefits early, but then later file a request to withdraw your original application with the Social Security Administration. Then, after that request was approved, you could go back and file a new application based on your older age -- and get higher benefits for life. The cost of doing so was that you had to pay back all the benefits you received -- but you didn't have to pay interest on them, and in some cases, you could even get tax refunds for taxes you paid on your benefits.
Unfortunately for retirees, the Social Security Administration took measures last December to eliminate the do-over provision. So now, you're back to having to make a smart decision the first time around.
How should you decide?
A recent actuarial study took a new look at this question with a greater amount of detail than you'll usually see in such studies. Often, people just look at the raw dollar amount they receive under various options and calculate a "break-even" point based on those payments. If you expect to live beyond that break-even age, you should wait to receive benefits; but if you expect to have a short lifespan, then taking early benefits is smarter.
What the better survey does, though, is look at the return on the money that early electors receive. By incorporating returns, you get a range of break-even ages, ranging from age 82 if your assets earn 5% annually to age 89 if they earn 8%.
The true answer, then, depends on what you expect to do with early benefit money. If you expect to be one of the few risk-tolerant retirees who continue to invest aggressively during retirement, then you might want to take early benefits and invest them in a basket of higher-growth plays including Vanguard MSCI Emerging Markets (NYSE: VWO), and the small-cap ETF iShares Russell 2000 Growth (NYSE: IWO). Fast-growing individual stocks such as yoga apparel retailer lululemon athletica (Nasdaq: LULU) and family tracker Ancestry.com (Nasdaq: ACOM) could also fit well with this strategy, although they certainly aren't guaranteed slam-dunk winners.
But if you're more conservative, then waiting to take benefits later may be the smarter move. Stocks like Colgate-Palmolive (NYSE: CL), McDonald's (NYSE: MCD), and Chevron (NYSE: CVX) may have plenty of attractive attributes, but you shouldn't count on them necessarily to produce the top returns that would justify taking early benefits.
Make the smart move
Of course, the decision on when to take Social Security benefits hinges on other factors as well, including how long you expect to work, your health, and whether you have a spouse whose benefits will depend on the decision you make. The key, though, is realizing that in many ways, when you start getting monthly Social Security payments is just another investing decision, and by treating it like one, you're more likely to make the right move when the time comes.
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