Taking Social Security
benefits early may not be best.l

    Pulling the trigger on Social Security benefits before full retirement age, a course of action many financial advisors recommend, appears to be the rule rather than the exception in this country. About three-quarters of individuals, before age 65, opt to finally draw from a system that has drained their paychecks for decades. 
    But with longer life expectancy and changing laws, following traditional "get it while you can, take the money and run" wisdom can be a costly mistake. "Many financial advisors use to recommend taking Social Security as soon as you become eligible," says Christine Fahlund, senior financial planner with T. Rowe Price, who recently co-authored a report on the topic. "But today, with people living longer in retirement, delaying Social Security for as long as possible may be a better strategy."
    Social Security replaces almost one-third of preretirement income for the highest-earning fifth of the population, says the Center for Retirement Research at Boston College, so the question of when to begin taking it comes up with the well-heeled as well as those who use it as a financial lifeline. "If someone has $1 million in assets and wants to take annual withdrawals of 4% at retirement, that comes to $40,000 a year," says Fahlund. "The $30,000 or $40,000 that a couple can get from Social Security represents a significant chunk of money."
    As the first baby boomers begin hitting 60 this year, more people will face a critical financial decision that defies a one-size-fits-all answer. "There is no rule of thumb on this," says Jay Shein, CFP, in Lighthouse Point, Fla., who often counsels clients on the issue. "You need to consider a lot of things. Is the person healthy? Does he intend to continue working part time? Is there a divorce situation where a former spouse may be entitled to receive Social Security payments?"

    At the heart of the gamble is whether individuals who begin taking payments at full retirement age or older will live long enough to make up for the lower benefits they would have received for a longer period of time by starting early. Someone who receives a benefit of $15,000 a year starting at age 62, for example, could wait until age 66 and receive a higher annual benefit of $20,000. Assuming the person spends his entire Social Security check, the decision to hold off only pays from age 78 on, when the cumulative benefit begins to exceed the amount collected under the early retirement option.  Wait until age 70 to begin payments, and the breakeven point versus starting at age 62 extends to age 80. (A "Break Even Age Calculator," located at the Social Security Administration's Web site (ssa.gov), can help determine how many additional months of early retirement payments it will take to compensate for the reduction in benefits.)
    Waiting may not seem like too much of a risk, considering that many people live well into their eighties. But not too many people are willing to ignore the whims of mortality, and less than 6% of individuals put off collecting their benefits past age 65. "It's extremely rare for my clients to wait until age 70 to begin collecting," says Shein. "And someone whose family has a history of poor health or parents who did not live to a ripe old age may not feel comfortable about delaying payments, no matter how much sense it might make from a financial standpoint."
    But there are times when it does make sense. For those with adequate sources of outside income at retirement, pushing back Social Security in exchange for higher payments years down the road provides a form of longevity insurance that can kick in later in retirement as other assets dwindle. For those born in 1943 or later Social Security benefits increase by 8% for each year of deferral past full retirement age, and that doesn't take into account annual cost-of-living adjustments. In short, the longer someone lives, the more it pays to delay.
    According to a study co-authored by Alicia Munnell and Mauricio Soto of Boston College, most men would do well to delay taking Social Security until age 69. The reason: Once a husband dies, his wife will be entitled to a survivor's benefit, which is mainly the continuation of her deceased husband's benefit. The delay increases the value of the survivor's benefit, which she is likely to collect because women tend to be younger than their husbands and often live longer. To achieve the maximum benefit, some women might consider waiting until normal retirement age to collect if they will likely spend most of the retirement period together because they are the same age or older than their husbands.
    On the other hand, says the study, the structure of Social Security benefits makes it advantageous for many married women to claim benefits as early as possible. As a rule of thumb, women should claim at age 62 when they have meaningful earnings. When they have virtually no earnings, they need to wait until their husband retires to claim. Married couples attempting to coordinate their Social Security claims need to consider a number of factors, including their ages, respective earnings and when they plan to leave the workforce.
    For those who have other assets or earned income they can draw on, taking benefits early and investing them in a separate account until they retire or need them to supplement other sources of retirement income can be a worthwhile alternative to delaying payments.
    A study by T. Rowe Price looked at a retiree who begins drawing a $15,000 annual benefit from Social Security at age 62 and invests the money in a balanced fund that earns 6% each year. Upon reaching full retirement age at 66, he stops working and starts taking the money from the separate account in equal withdrawals at a rate that would deplete the account by age 95. In this comparison, the individual would have to live past age 90 to make it worthwhile to delay receiving the $20,000 annual benefit at age 66. If he delayed taking benefits until age 70, he would have to live at least until age 94.
    The strategy involves some risk because investments may not earn the assumed rate of return. It also requires discipline.
    "Just be sure you know your client well," advises Fahlund. "You don't want to recommend that someone take Social Security and invest the money when they might be just as likely to take it and spend it."