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The big decision: When to start collecting Social Security

Should you take your Social Security benefits early or wait until your full retirement age –- or maybe even later?

It’s a question that most retirees face and, unfortunately, there is no one right answer, says the Maryland Association of CPAs. Read on for an overview of Social Security payment options and several factors to consider in making your decision.

When to collect

You can begin collecting Social Security benefits as early as age 62. However, when you start collecting that early, your monthly benefit is reduced to offset the longer period over which you will receive benefits.

For example, if you decide to elect benefits at age 62 in 2007, the benefit reduction is about 25 percent. Keep in mind that the reduced amount is permanent –- your benefit does not go up when you reach your full retirement age.

The retirement age for collecting full Social Security benefits is being gradually increased. Under current law, for those born in 1937 and earlier, 65 is the normal retirement age for collecting full benefits. If you were born in 1938 through 1942, the retirement age is now increasing by a few months a year. The normal retirement age for people born from 1943 through 1954 is 66 (increasing by a few months a year through 1959), and those born in 1960 won’t receive full benefits until they are 67.

Delayed benefits

If you delay collecting Social Security benefits beyond your full retirement age, you earn “delayed retirement credits” which increase the monthly benefit you eventually receive. For each year that payments are delayed after normal retirement age, monthly payments increase by as much as 8 percent. You stop earning delayed retirement credits when you reach age 70.

Which payment option is best for you?

Even though all three options are designed to eventually pay out roughly the same total amount, there are some instances when one alternative might make more sense than another. Following are several factors that you should consider.

• Health and life expectancy: One important factor is your life expectancy. You could consult one of the many life expectancy calculators online, but be sure to take into consideration your personal health and family history. Is your health relatively good? Did your parents and grandparents live into their 80s or 90s? If so, you might want to delay starting your benefits until full retirement age or later, as long as you can afford to do so. If you live to a ripe old age, you may need more money in later years, after your retirement funds have run low. On the other hand, if your health is not good, you might opt for early benefits.
• Work plans: Do you plan to continue working after retirement? If so, taking early benefits might be a mistake because there is an "earnings cap" penalty on Social Security benefits paid prior to your normal retirement age. If you begin collecting benefits early and your job brings in more than the cap — $12,960 for 2007 — you lose $1 in benefits for every $2 earned over the annual limit. Once you reach your normal retirement age, there is no loss of Social Security benefits, regardless of earnings. However, as long as you continue to work, you pay Social Security taxes on your earnings regardless of your age.
• Providing for your survivor. Are you concerned about providing the largest monthly benefit for a surviving spouse? A surviving spouse is entitled to 100 percent of the primary wage earner’s benefits. To leave the most income for your surviving spouse, you should consider waiting until your normal retirement age or later to tap your benefits.

Deciding when to take retirement benefits is an important and complex decision. A CPA can help you examine your options and make an informed decision.

Only CPAs are equipped to address your full range of financial needs with integrity and insight. In Maryland, CPAs must pass a rigorous two-day examination, adhere to strict ethical and professional standards, and, beyond college, complete 80 hours of continuing education every two years to be certified by the state — accountants do not.

Your doctor is certified; your lawyer is certified. Make sure your accountant is a certified public accountant.

For CPA referrals in your area, contact the MACPA at (410) 296-6250 or click here.

The Maryland Association of Certified Public Accountants (MACPA) is a statewide professional association that provides leadership, information and services for its nearly 10,000 CPA members, who are employed in private practice, industry, government and education. CPAs are business and financial professionals who have passed a rigorous two-day examination in order to be licensed by the state. CPAs are committed to protecting the public interest, and must adhere to stringent ethical and professional standards and continuing professional education requirements.