As baby boomers approach retirement age, many will face a tough, but critical financial decision: When to take Social Security benefits.
For the oldest of baby boomers turning 60 this year, the full retirement age for benefits is 66.
They can opt to start benefits earlier, beginning at age 62. The trade-off is that monthly benefit checks will be lower for life because they are collecting them for more years.
Or, they can delay benefits up to age 70 and get the largest possible monthly benefit.
On average, it's not supposed to matter. Retirees on average receive similar lifetime benefits whether they start taking them early, at full retirement age or at 70. But who's average?
Live longer than average, say into your late 80s or 90s, and you would have been better off delaying benefits. Going splat while skydiving at 64, you would have done better to have started the checks at 62.
"It's a huge gamble for everybody," said Clare Hushbeck, an AARP economist.
Once you start drawing benefits, it's hard to reverse course. You can withdraw your application for early benefits if you change your mind, but you will have to repay any money received so far, said Dorothy Clark, a Social Security Administration spokeswoman.
So as older boomers approach retirement, they need to consider a variety of factors on when best to take Social Security to maximize their lifetime benefits. The main factor - and the most difficult to know - is how long they will live.
"It's a game of life expectancy," said Mauricio Soto, a senior research associate with the Center for Retirement Research at Boston College.
The case for taking benefits early: If your family's health history indicates your retirement is likely to be a short one, then it may be wise to grab benefits while you can.
Some workers don't have a choice because of finances. The only way to make ends meet if they retire at 62 is to take their benefits then.
But sometimes it makes sense to take benefits as early as possible if you don't need them, said Sam Beardsley, director of investment taxes at T. Rowe Price Associates in Baltimore.
By investing early benefits instead of spending them, people under most scenarios can end up with more benefits over their lifetimes than if they delayed taking benefits until their normal retirement age or even at 70, he said.
This strategy only works if people are disciplined investors and not spenders, Beardsley warns. And they must have enough money to live on without dipping into Social Security benefits until at least full retirement age, he said.
Live off wages
Take the case of a worker whose normal retirement age is 66, but she starts receiving Social Security benefits at 62. During those four years, she lives off her wages of $30,000 a year and perhaps some savings.
(This scenario takes into account that Social Security reduces benefits by $1 for every $2 a worker earns above $12,480 this year. It also factors in that 85 percent of her benefits are taxed.)
In this example, her early benefits are invested and earn a 6 percent annual return. At 66, she retires and begins to draw down her invested benefits to supplement her monthly Social Security payment.
Whether she dies at 70 or 80, she comes out ahead by having invested early benefits, Beardsley said. For example, her benefits and investment earnings would total $247,708 by the time she turned 80.
But if she waited to take benefits at 66, her total would reach $236,250. Waiting until 70, the total would be $228,690, Beardsley said.
However, at age 90, the advantage of starting benefits at 70 outweighs investing early benefits, Beardsley said. At that point, lifetime benefits reach $436,590 for those starting payments at 70; $393,750 for those starting at 66; and $394,057 for those investing early benefits.
When investing Social Security money, Beardsley recommends certificates of deposit, a high-grade bond fund or nothing riskier than a balanced fund that's split between stocks and bonds. "You don't want to gamble with the rent on the way to the landlord's," he said.
Andy Keeler, a financial planner in Ohio, said he's been using this strategy successfully with clients for the past 11 years. Clients live on income from pensions and other assets while investing Social Security benefits and building up a reserve fund.
"You can draw on it at a later date, 65, 67 or whatever your normal retirement age is, to supplement your Social Security benefit," he said.
Mathematically, the investment professionals are right, said Soto, the Boston College research associate. But this might not be a good idea for the large number of Americans who depend on Social Security and can't risk losing money in volatile markets or see benefits eroded by investment fees, he said.
The case for delaying benefits: For someone who is not an investor or who expects to live a long life, the best option is to hold off taking benefits as long as possible, experts said.