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When to begin receiving social security benefits.

Social Security Administration (SSA) statistics indicate that a majority of U.S. citizens elect to begin receiving Social Security benefits at age 62; see Song and Manchester, "New Evidence on Earnings and Benefit Claims Following Changes in the Retirement Earnings Test in 2000" (July 2006), available at www.ssa.gov/policy/docs/workingpapers/ wp107.pdf. Is this a wise choice? Is there an optimum age to begin receiving benefits? This column explores the answers to these questions.

An individual who reaches age 62 in 2007 has a full retirement age (FRA) of 66 (i.e., the age at which he or she would receive 100% of his or her Social Security benefits). Opting to receive benefits between ages 62 and 66 results in a reduced benefit. The reduction factor applied to the full benefit is 5/9 of 1% for each of the first 36 months that benefits begin before the FRA, plus 5/2 of 1% for each month in excess of 36 months; see "Find Your Retirement Age," available at www.ssa. gov/retirechartred.htm, and SSA Pub. No. 05-10070," Your Retirement Benefit: How It Is Figured" (January 2007), available at www.ssa.gov/pubs/10070. html. Individuals who turn 62 in 2007 and want to begin receiving benefits immediately will get only 75% of the benefits they would have received had they waited until age 66. There will be no change (other than cost-of-living increases) to these individuals' benefits under their own work histories for the remainder of their byes.

Comparing Break-Even Points

The argument is sometimes made that if individuals saved all of their reduced monthly benefits from age 62 to 66, they would be far ahead of the person who waits until age 66 to begin receiving benefits.

The tax adviser might consider an example with three assumptions: (1) a 5% after-tax return rate; (2) all funds received at either age 62 or 66 are invested; and (3) no withdrawals are made from those investments over life expectancy. The break-even point is somewhere between ages 77 and 78 (see Exhibits 1 and 2 on p. 409).

According to the uniform life expectancy table, life expectancy at attained age 62 is 85.5 years and at attained age 66 is 86.2 years; see Regs. Sec. 1.401 (a)(9)-9, Q&A-1. Based on these life expectancies and a break-even point around age 77, it is always better to begin to receive Social Security benefits at the FRA. But life does not always follow actuarial tables; there are other factors to consider when advising clients when to begin receiving benefits.

Weighing Other Factors

Health: What is the individual's health status? Someone in poor health at age 62 may not live to be age 77, the statistical break-even point. Because of poor health, this individual may no longer be able to work and would need Social Security payments at age 62 to survive financially.

Earnings: What is the individual's earnings potential? The earnings limit for someone at less than the FRA who wishes to collect Social Security benefits in 2007 is $12,960; see SSA Pub. No. 05-10069, "How Work Affects Your Benefits" (January 2007), available at www.ssa.gov/pubs/10069.html. For every $2 that individual earns in excess of $12,960, $1 will be deducted from his or her Social Security benefits; see id. Individuals with limited earnings potential could supplement their finances by continuing to work and collect Social Security benefits. Because of the earnings limit, those taking benefits before the FRA would need to earn three times their Social Security benefits for the penalty to equal the benefits they are receiving, and they would be left with no benefit.

Abilities: What are the individual's needs? Many people would prefer to continue working as long as possible. As the U.S. employment market turns toward service jobs and away from labor-intensive jobs, that preference might become easier to meet. A laborer who has a physically demanding job may not have the luxury of working beyond age 62, because he or she is not physically able to do so, while an individual in an office or other nonlabor-intensive job may not face the same physical requirements to continue working.

Marital status: What is an individual's marital status? A spouse can receive the greater of his or her own benefit or one-half of the spouse's benefit; see SSA Pub. No. 05-10035, "Retirement Benefits" (January 2007), available at www.ssa.gov/pubs.10035.html. Individuals can receive a spouse's benefit only when their husband or wife has also begun collecting benefits; see id. When there is a great disparity in a couple's earnings, or when one spouse has not been employed for long, one tactic is for the spouse who earned less to elect to receive benefits under his or her own work history at age 62. At the FRA, assuming that the higher-earning spouse is now eligible to receive benefits, the lower-earning spouse can claim spousal benefits and receive an increase if the one-half spousal benefit is greater than the benefit he or she had been receiving.

Savings: What other retirement savings does a person have? Even if individuals must retire at age 62, it might be a good idea to delay receiving benefits if they have other savings and investments to cover living costs. If an individual elects to receive early benefits at 75% of the full benefit, to come out ahead, the four-year investment return on those benefits would have to be about 8% a year. In other words, Social Security is providing a guaranteed 8% return for waiting. It might be more beneficial to delay receiving benefits and use other investments for that four-year period.

Conclusion

The decision about whether to take Social Security benefits at age 62 or 66 can be simply a statistical and mathematical comparison, or it can be an emotional and thought-provoking exercise. It is important for advisers to ask questions and encourage dialogue so that clients can make well-informed decisions.

For further information about this column, contact Mr. Schulman at michael@schulmancpa.com or Mr. Sarenski at tjs@dbbllc.com.

Editor:

Michael David Schulman, CPA/PFS

Schulman CPA, An Accountancy

Professional Corporation

New York, NY

Author:

Theodore J. Sarenski, CPA/PFS, CFP

Partner

DB&B Financial Services, LLC

Syracuse, NY
Exhibit 1: Investment with 5% return
starting at age 62, 2007-2033 (in dollars)

 Beginning Amount Earnings Ending
Age balance invested * at 5% balance

62 -- 19,044 476 19,520
63 19,520 19,044 1,452 40,016
64 40,016 19,044 2,477 61,537
65 61,537 19,044 3,553 84,134
66 84,134 19,044 4,683 107,861
67 107,861 19,044 5,869 132,774
68 132,774 19,044 7,115 158,933
69 158,933 19,044 8,423 186,400
70 186,400 19,044 9,796 215,240
71 215,240 19,044 11,238 245,522
72 245,522 19,044 12,752 277,318
73 277,318 19,044 14,342 310,704
74 310,704 19,044 16,011 345,759
75 345,759 19,044 17,764 382,567
76 382,567 19,044 19,604 421,216
77 421,216 19,044 21,537 461,797
78 461,797 19,044 23,566 504,407
79 504,407 19,044 25,696 549,147
80 549,147 19,044 27,933 596,124
81 596,124 19,044 30,282 645,451
82 645,451 19,044 32,749 697,243
83 697,243 19,044 35,338 751,626
84 751,626 19,044 38,057 808,727
85 808,727 19,044 40,912 868,683
86 868,683 19,044 43,910 931,638
87 931,638 19,044 47,058 997,740
88 997,740 19,044 50,363 1,067,147

* Annual total for reduced Social Security benefit payments of $1,587
per month.

Exhibit 2: Investment with 5% return
starting at age 66, 2007-2033 (in dollars)

 Beginning Amount Earnings Ending
Age balance invested * at 5% balance

62 -- -- -- --
63 -- -- -- --
64 -- -- -- --
65 -- -- -- --
66 -- 28,584 715 29,299
67 29,299 28,584 2,180 60,062
68 60,062 28,584 3,718 92,364
69 92,364 28,584 5,333 126,281
70 126,281 28,584 7,029 161,893
71 161,893 28,584 8,809 199,287
72 199,287 28,584 10,679 238,549
73 238,549 28,584 12,642 279,776
74 279,776 28,584 14,703 323,063
75 323,063 28,584 16,868 368,515
76 368,515 28,584 19,140 416,239
77 416,239 28,584 21,527 466,350
78 466,350 28,584 24,032 518,966
79 518,966 28,584 26,663 574,212
80 574,212 28,584 29,425 632,222
81 632,222 28,584 32,326 693,131
82 693,131 28,584 35,371 757,087
83 757,087 28,584 38,569 824,239
84 824,239 28,584 41,927 894,750
85 894,750 28,584 45,452 968,786
86 968,786 28,584 49,154 1,046,524
87 1,046,524 28,584 53,041 1,128,149
88 1,128,149 28,584 57,122 1,213,855

* Annual total for full Social Security benefit
payments of $2,382 per month, based on 2007
maximum Social Security benefit of $2,116 per
month increased by 3% annual cost-of-living
adjustment.
COPYRIGHT 2007 American Institute of CPA's
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 2007, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:Personal Financial Planning
Author:Sarenski, Theodore J.
Publication:The Tax Adviser
Date:Jul 1, 2007
Words:1598
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