Q. I am planning to retire in a few years and am looking at my financial picture. Is it best to start Social Security benefits as soon as I'm eligible at 62? Or should I wait until later and get a bigger monthly payment?
A. If only there were an easy answer. ... Unfortunately, the easy answer applies only to people who have no choice because they need to start collecting benefits as early as possible to pay the bills.
Others have the option of postponing these benefits while they work a few more years, thus getting the bigger benefit that comes to those who wait. And some people don't need the income during their 60s even if they are retired.
Social Security benefits vary depending on how much money you made in your working years, the year you start taking benefits, and your age when benefits start.
Someone who turned 65 this year and earned the maximum benefit would be getting 18,438 a year if he'd started at 62. By waiting until "full retirement age" of 65.8 years, he could get 24,685. Or he could get 34,184 by waiting until turning 70.
The advantage from waiting has to be weighed against the cost. Between ages 62 and 70, this person would receive eight years of benefits worth 147,504. Although the annual income would be much bigger if he waited to 70 to start benefits, he'd be 80 before those bigger payments offset what he'd forgone between ages 62 and 70.
So the rule of thumb is that the younger you will be when you die, the more it makes sense to start the benefits earlier. If you live beyond the break-even point -- about 80 years old in this example -- you get more by waiting to start.
The decision on when to start also involves work, and taxes.
If you start taking benefits at 62 and continue working full- or part-time, your benefit is not affected so long as you earn less than 12,480 a year. But for every dollar you earn above that limit, your benefit is reduced 50 cents. In the year you reach full retirement age (which varies depending on when you were born), this penalty is reduced, to 33 cents for every dollar earned above 33,240.
After that, there's no penalty.
Federal income tax can be due on Social Security benefits if one has a high "provisional income." This is "adjusted gross income," found on your tax return, plus any tax-exempt interest from investments plus half of your Social Security benefit. Since adjusted gross income includes investment income and profit, you could hit the provisional income limit even without a job.
For married couples filing joint tax returns, up to half of the Social Security benefit can be taxed if provisional income exceeds 32,000, and 85 percent of the benefit can be taxed if this figure exceeds 44,000. For single people, those figures are 25,000 and 34,000.
Would it pay to take the lower benefits at 62, even if you don't need them, and to let them grow in an investment?
It's hard to know for sure, since so much would depend on investment returns and tax rates. But a T. Rowe Price analysis found that people who expect to live into their 80s or beyond are probably better off waiting to start benefits until full retirement age or 70, even if they could get an investment return as high as 6 percent a year on benefits taken earlier.
Is your head spinning yet? Mine is, and I'm supposed to be on top of all this.
My advice: Start thinking about this well ahead of retiring -- and consider asking a financial adviser for help.
Jeff Brown is a business columnist for The Philadelphia Inquirer. E-mail him at firstname.lastname@example.org.