A key question facing millions of baby boomers who turned 62 this year and became eligible for Social Security benefits is: "Should they take a reduced Social Security monthly payment now, or wait a few more years when that monthly payout could be more than double, depending on how long they wait?"

In these difficult financial times, especially for a large number of pre-retirees who have seen their life savings sliced in half by a hungry bear market, receiving a monthly check from the government could be a necessity.

Even in good times, deciding when to apply for Social Security benefits is one of the most important decisions facing anyone over the age of 62. This supposedly is guaranteed lifetime inflation-adjusted income, that when totaled, could become one of your most significant assets. For many, if all the checks over ones life span were added together, it might match or even exceed the amount they've put away in their 401(k) plans or individual retirement accounts (IRAs).

A new survey has found that many baby boomers plan to sign up for their Social Security checks as soon as they're eligible. The Fidelity Investment Survey shows that 45 percent of a group of 300 people who were 61-years-old expected to begin receiving Social Security when they turn 62. The first reason cited was "financial necessity." They need the money now to pay for basic living expenses such as food, utilities and mortgage payments.

Other reasons include health and worries about longevity, as well as a desire to collect as much as possible from a system that some believe may run out of money, and that the government will then not be able to pay anything to those who were once promised lifetime benefits.

The Fidelity Investment Survey also found that only 10 percent of those surveyed plan to wait until their full retirement age to claim their benefits. Nine percent said they'll file claims between the ages 67 and 70.

Three choices

Basically, we have three primary choices when it comes to applying for Social Security:

• Applying at age 62 and receiving a reduced benefit for life, about 25 percent less than full benefits

• Applying at full retirement age, around 66, and receiving full benefits for life

• Applying at age 70 and receiving additional credits for life, which could be as much as 76 percent more a month than what you would have received if you began getting payments at age 62.

The optimum age for when you should dip into the Social Security well is different for everyone and is determined by a number of factors such as health, life expectancy, your financial situation, your marital status, and taxes.

Financial advisors are typically divided on this subject. Some recommend waiting until age 70 because you will receive a bigger payment each month. But you will have also given up eight years of monthly smaller payments.

Others say that you should take the benefits as soon as possible. Even if you don't need it,so you can invest that money and possibly earn returns on that investment that beat what the government would give you in the future. But to do that, you would have to get a nine to 10 percent return on your investment just to match the annual cost of living adjustments and tax preferences you get from Social Security.

With the market nearly 40 percent off its high from a year ago, and still testing its bottom, that isn't likely to happen any time soon.

Break-even age

Social Security has actually determined a break-even age that you can calculate to help you decide what to do. The break-even age is that age where taking a smaller payment for a longer period of time matches the amount you would have received by taking the larger payment for a shorter span of time.

To put it another way, this is the age you have to live beyond in order for delayed benefits to provide a higher lifetime income. For example, if you take payments at 62 instead of 66, your break-even age is 76 years and 5 months. If you wait until you're 70 years old, the break-even age is 79. If you want to compare benefits of ages 66 versus 70, you have to live beyond 80 years and 9 months to make it more beneficial to wait until you're 70 to claim Social Security benefits.

For married couples, the timing gets even more complicated. When the spouse earning the most dies, the surviving spouse can get a benefit based on the deceased's work history. The larger that is, the more money the widow or widower will get in his or her remaining years. Therefore, the spouse earning the larger pay check should delay taking benefits as long as possible, leaving the other to take an early payout.

Cost of living adjustments

Most break-even analyses ignore the impact of cost of living adjustments (COLAs). COLAs are designed to help retirees keep up with inflation. When COLAs are applied to the higher benefit available at age 70, the breakeven age gets younger. The longer a retiree lives, the higher the lifetime benefit will be due to the impact of COLAs on the higher starting amount. Next year, COLA jumps from 2.3 percent in 2008 to 5.8 percent for 2009, which is the largest percent increase since 1982. With the magic of annual compounding, COLAs add up over your retirement years.


There are also some tax considerations that could influence your timing. If you retire at age 62, you have a choice of applying for early Social Security benefits, or delaying them and taking income from your IRA rollover during the "bridge period" (the years between retirement and age 70). Some advisors recommend leaving the IRA rollover alone so it can continue to grow tax-deferred, and take the reduced Social Security benefits to meet current spending needs.

When to apply

If, like many baby boomers burned by the bear market, you have no choice, start collecting Social Security as soon as you can. That means if you are laid off, and are forced into early retirement, or have health problems, and your nest egg isn't enough to live on, a monthly Social Security check may be your only option.

On the other hand, if you are in good shape, financially and health-wise, putting off applying for Social Security could boost and even more double the amount of your monthly check, plus you could pass on a larger payment to your spouse, if he or she receives a survivor benefit based on your work record.