Start Thinking About Social Security

Most of us over 25 years old receive annual Social Security Statements about 3 months prior to our birthday.  These statements show us how much we have paid in towards Social Security and Medicare taxes over our lifetimes and how much our estimated benefits will be once we retire.

It is interesting to see how much you and your employers have paid out in Social Security over the years.  Yet at the same time it is frustrating because we don't have access to that money and the Comissioner tells us that by 2040 the number of Americans over 65 will double and there will not be enough money coming in to pay them without changes in the system.  More reason to invest in a 401(k) or IRA.

One way the Government is making up the gap is by increasing the "Maximum Taxable Earnings" subject to the 6.2% Social Security tax each year.  In 2008 they are increasing this wage base from $97,500 to $102,000, a 4.6% increase.  This increase is double the 2.3% Cost of Living adjustment being given to retirees on Social Security in 2008.

So assuming Social Security is still there for you when you retire, you can opt to take "early" retirement at age 62.  However, your monthly payment will be much less then if you waited until your "normal" retirement age (defined as 66 years old if you were born between 1943 and 1959 and 67 if you were born since 1960).  In my case, it would be 30% less, but I would have 5 extra years of payments. 

You can increase your monthly payments by as much as 24% more by waiting another 3 years past your normal retirement age to start your payments.

In my case we're talking $1600 per month if I retire at age 62 vs $2300 per month at age 67 vs $2850 per month at age 70.

So if I retire at age 62 I'll be paid $96,000 by age 67.  If I wait until age 67 it will take me 11.5 years to break-even and I'd be ahead after reaching age 78.5.  In other words, if I think I'll be living well into my 80s it makes sense to hold off and take normal retirement. 

You can calculate your estimated benefits and your break-even age on the Social Security Administration website at www.socialsecurity.gov.

What to do?  Heck if I know.  But generally speaking it seems best to wait to earn your full benefit, especially if you are healthy.  But then again, it might be better to start taking the money and investing it, especially if the future of Social Security payments is in question.  It also makes sense to take early retirement if you are in doubt of living into your 70s or if you simple really need the money!