Many financial planners recommend waiting until at least your full retirement age -- or, even better, until you're 70 -- to claim Social Security.
You're eligible to file for Social Security as early as age 62, but if you do, your benefits will be permanently reduced by at least 25 percent. Waiting until full retirement age -- 66 for most baby boomers -- means you'll receive 100 percent of the benefits you've earned. And if you continue to postpone filing for benefits after you reach full retirement age, your payouts will grow by 8 percent a year until you reach age 70.
That, combined with cost-of-living adjustments in most years, is a return you're unlikely to get anywhere else. Yet nearly 60 percent of retirees claim benefits before age 66, and about one-third of those retirees claim benefits at 62.
Figuring out when to file for Social Security usually comes down to a question that's nearly impossible to answer: How long will you live?
Retirees who wait until full retirement age or later will receive fewer checks over their lifetime, but the checks will be for larger amounts. The longer you live, the more delaying pays off.
The age at which you come out ahead by postponing benefits is known as your break-even age. For example, a 62-year-old top wage earner would come out ahead by filing at 66 as long as he lives past age 77. If he delays filing for benefits until age 70, he would need to live past age 80 to break even. That's below the average life expectancy (84 for men and nearly 87 for women who attain the age of 65), but if you don't expect to live that long, there's no point in postponing your benefits.
However, if your grandmother celebrated her 100th birthday by playing a few rounds of golf, and you're fit and healthy, you're probably better off waiting until at least full retirement age -- or, better yet, age 70 -- to file your claim.
If you're married, there's another factor to consider: survivor benefits. For example, if you're the higher earner and you die first, your spouse will be able to take over your benefits. Delaying benefits will boost the monthly benefit your spouse will receive after you're gone.
Some retirees remain convinced that they can come out ahead by filing at 62 and investing their benefits. That way, they argue, they won't leave money on the table if they die before their break-even age. This strategy also appeals to retirees who fear that a shortfall in the Social Security trust fund will force the government to cut future benefits.
But in order to beat the guaranteed return you would get by delaying benefits (plus cost-of-living increases), you'd need to invest most of your benefits in stocks, financial planners say. That could work out in your favor -- but if the market turns bearish, you won't have years to recover your losses, says Gifford Lehman, a certified financial planner in Monterey, Calif.
Sandra Block is a senior editor at Kiplinger's Personal Finance magazine. Send your questions and comments to firstname.lastname@example.org.