by Tenielle Shallman, Manager – Central Planning, Wealth Enhancement Group

Social Security benefits make up a large percentage of income for American’s age 65 and older. So, it’s no wonder Financial Planners are often asked “When should I begin receiving Social Security Benefits?”

Let’s first look at the various benefits available and how they are calculated.

Normal Retirement Age (NRA) Benefit – This is the age at which 100% of an individual’s Primary Insurance Amount (PIA) is available. NRA depends on the year in which you were born, but ranges from age 65 to 67.

Early Retirement Benefit – A retired worked who is fully insured can elect to start receiving a reduced benefit anytime between age 62 and their Normal Retirement Age. The amount of reduction depends on your year of birth and your NRA. An individual who elects to start benefits before NRA will have their Primary Insurance Amount (PIA) reduced by 5/9 of 1% for each of the first 36 months the worker is under his/her NRA when payments commence. The benefit is reduced further by 5/12 of 1% for each month in excess of 36 months before NRA. As a general rule, a person taking reduced retirement benefits before normal retirement age will continue to receive a reduced rate after normal retirement age. It is important to note, that for individuals who are under the normal retirement age for the entire year and have earned income, benefits will be reduced $1 for every $2 of earnings over $14,160 in 2009 (adjusted annually). For the year in which you reach your normal retirement age, your benefits are reduced $1 for every $3 of earned income before the month you reach normal retirement age above $37,680 in 2009 (adjusted annually).

Delayed Retirement Benefits – If you decide to wait and take your retirement benefits at a later date, your retirement benefit increases by a specified percentage of your PIA up to age 70. The amount varies, again, depending on your year of birth.

Once you know the details of your various estimated benefits a break even analysis can be performed. This analysis would estimate at which age one benefit would become more advantageous over the other. Once you know the break-even age, you would want to assess your health and longevity to determine your own likelihood of reaching and/or surpassing the break-even age.

Additional consideration should be given to your ‘need’ for beginning benefits earlier vs. later. If your cash flow is such that you need the income you may decide to begin benefits as early as possible. Or, if you do not need the income now but decide to start collecting and you begin a savings plan for your benefits, the impact should be assessed in the breakeven analysis discussed above.

An understanding of how your benefits are calculated, taxed, and what happens if you continue to work while receiving benefits are all important. The decision is important one. If you have questions regarding your particular situation, please contact your Wealth Enhancement Group Team.