By now, I hope you've read my article on "The Psychology of Money." If not, here's another chance.

It can sometimes get depressing reading about how unprepared boomers are for retirement. At Platinum Years, we have lots of ideas to help bridge the gap in that area, and one of the best ways is to make a good decision about social security. As you may realize by now, I'm a bit of a crusader on this topic. Not so much because I think everyone should wait, but because I'm CONVINCED that MILLIONS of the 72% of retirees who have taken their benefits early have made costly mistakes. And when the oldest boomer, Kathleen Casey-Kirschling, signed up for early social security last October, I was shocked to read that more than 70% of YOU plan to do likewise! This caused me to write “Don’t Do It,” on November 20th, 2007 on the Platinum Blog. Now I confess, I felt like a killjoy. You know, like the kid who reminds teachers that they forgot to give homework. Saying no to people is not exactly the way to build up a readership, but neither is dishonesty. So I decided to take a more positive approach. Yah, that's the ticket. This is such an important principle, and with apparently so many of you planning to begin taking your benefits “early,” I just have to make sure you first have the facts.

So here are some of the benefits of delaying retirement. From an Economic and Budget Issue Brief from the Congressional Budget Office, dated March 14, 2004, entitled “The Retirement Prospects of the Baby Boomers,” comes an excellent and concise summary from a section entitled “The Effects of Delaying Retirement”:

"For households facing shortfalls in their retirement savings, relatively small changes in behavior can have surprisingly large effects. Because people who retire at 62 can expect to live another 20 years, each year they postpone retirement reduces their need for retirement savings by about 5 percent. An extra year of work also increases their Social Security benefits by several percent. Taken together, those effects lessen the total amount that people need to save, and the additional year gives them time to save more and earn returns on the assets they have already accumulated. As a result, households can make up for earlier shortfalls in retirement savings with surprisingly modest changes in behavior."

So let me take a positive approach. Here are the BENEFITS of waiting. FOR EVERY YEAR YOU WAIT:

+ Your total retirement needs drop by around 5%, as it says in the CBO article (because you're funding one less "idle" year)

+ Your benefits when you take them will be 7-8% higher FOR LIFE

+ You have one more year of earnings on your savings and investments

+ … Or one more year to pay down on debts

+ If you keep your career job, you will also probably raise the base against which your benefits are calculated.

+ If you keep your career job, you will not have to pay for your own medical insurance thru age 65.

On that last point, you should realize that although you can sign up for social security benefits early, you CANNOT sign up for Medicare until age 65! From what I read, this is a common misconception, and can result in some pretty stiff medical insurance bills from age 62 to age 65.

Now there’s a financial analysis involved in all of the above, and if you have a financial person “run the numbers,” you can actually project a breakeven point beyond which you have a net benefit. You might determine, for example, that you’ll be better off if you live longer than 77-78… that would be a typical number. And if you factor in the effect of the time value of money, you might add 3-4 years to that breakeven point.

But there’s a bigger factor in this decision. It’s a huge factor, in my opinion… FLEXIBILITY.

Given two decisions of roughly equal value, you should always take the one that offers you the greater flexibility. If Decision A precludes EVER being able to pick Decision B, and Decision B does not preclude you from ever picking Decision A, you should go with Decision B every time.

The above decision rule has proven itself time and time again in my life because, as has been said, “Prediction is very difficult. Especially when it is about the future.”

The truth is, we don’t know which decision will be better for us. But for every year I hang in there, all of the above listed benefits apply. And if I change my mind or truly NEED to start collecting, I can always reverse the decision to wait, and start collecting at age 63, 64, etc.

Now I know many of you have been reading along wondering if there are any loopholes in my scrooge-like analysis Yes! There are at least three main exceptions to the above arguments for delaying retirement benefits. When any of these apply, EVEN I I will give you my blessing to “take the money and run.” :-) Two of these are fairly common ones and the third is a bit more obscure:

Exception #1 – Shortened Life Expectancy. I was going to say illness for this one but a "life expectancy" test is really more accurate, because it might include family medical history as well. I indicated yesterday that if you run the numbers, you can come up with a breakeven date (often in the late 70s) beyond which you are better off for having waited. It stands to reason then that if you have cause to believe that you won’t make it to that date, you are better off taking what you can get as soon as you can get it.

Exception #2 – REAL Financial Need. I can’t emphasize the word “REAL” here strongly enough. I know there are a lot of legitimate needs out there, but at the same time, our culture has made an art form (it’s called “advertising”) out of convincing us that our wants are really needs. So be there are tons of rationalizations that can be made here.

I am reminded of my Italian grandmother whose inheritance was left in what is known as a “spendthrift trust” by my financially savvy Italian grandfather. All she had to do to get the money was to convince Grampa’s lawyer that she NEEDED it. As I look back, some of her letters to the lawyer for money were pretty laughable. And oh, did she heap Italian curses on that poor man when he turned her down! But I digress…

Exception #3 – Spouses with a Large Age Difference. As I said in the intro, this one is a little more obscure. And perhaps I really should say “large life expectancy difference” here, so this works especially well with an older husband and younger wife, because the age difference simply expands the number of years that she will probably outlive him anyway. And it helps if the older one has higher income as well. The reason this works is that when one spouse dies, the other will receive the higher of either their own benefit or their widow(er) benefit, which is based on the spouse's income.

So in the case of an older higher income husband with a younger wife, the one who should take the early benefit here is the younger wife, because if he dies “on schedule,” her benefit will step up to a percentage of his and wipe out the discount she was assessed for drawing funds early. In cases like this, the advantage is magnified further by the husband DELAYING his social security, so that if and when the time comes, the wife receives that much more.

In either of the above exceptions, some cases have some tough borderline calls. Here is where it pays to have a good friend/mentor/financial planner/life planner in your corner who can ask you the tough questions, and whom you can trust to be honest with you. And of course, your friends, including yours truly, at http://www.platinumyears.net/ are always willing to throw in their two cents worth as well.

We’re going to make sure that you at least are well aware of the benefits you may be giving up.