When should you start receiving Social Security?

Key Points

Q. What is the optimal age to begin receiving Social Security benefits?

Why should you wait to take Social Security until age 66? If you plan to work and will earn in excess of the annual limit before you reach full retirement age, you may lean toward waiting until you are 66. Social Security benefits are reduced if you collect benefits before full retirement age and earn more than the annual limit. You may also consider working until you are 66 if you are single, have little savings, or have a longer life expectancy.

If your spouse is still working and has earned income, which may cause a larger portion of your Social Security benefits to be taxed, you may want to hold off until your income and tax rate are lower. If your spouse's benefit is smaller than yours or your spouse is much younger than you, keep in mind that your combined life expectancy will be longer than either of your single life expectancies. This means that if you take Social Security at age 62 and your spouse's benefit is based on your benefit, it will mean a significantly reduced benefit for your surviving spouse's lifetime.

For others, it makes sense to start receiving Social Security benefits at age 62 for the peace of mind of having the money in hand, rather than waiting an extra 3 to 5 years, even if it means a reduced benefit and fewer dollars paid out over your lifetime. For those who will not have earned income in excess of the annual earnings limit between age 62 and full retirement age, it may make sense to collect at 62. Sixty-two may also look better than 66 if you have health issues or a shorter-than-average life expectancy. Plus, if your spouse's benefit is larger than your own, you may choose an early retirement.

Ultimately, since you don't know how long you'll live, your decision will likely have less to do with maximizing your total Social Security payout and more to do with your overall personal retirement plan.

Q. With concerns surrounding the bond market, is there a way to minimize risk?

A. Investors should always consider ways to manage risk in their fixed-income portfolios. Here are a few guiding principles:

Hold shorter-term issues. This approach may help reduce volatility while enhancing liquidity. Also, fixed-income investors who hold investment-grade bonds must consider their exposure to changes in interest rates. Bond prices move in the opposite direction of interest rate changes, and the longer a bond's maturity, the greater its price change.

Stay broadly diversified. Holding many municipal bond issues and avoiding concentration in a particular state, sector, or issue type can help reduce the impact of a few non-performing bonds. If default rates rise, investors with a well-diversified municipal portfolio should be less exposed.

Focus on quality and use market pricing to confirm credit ratings. The most creditworthy bonds are those rated AAA or AA, and most of the current problems involve lower-rated bonds. Although ratings are useful, recent history in the mortgage-backed securities market has shown that a bond may not be rated accurately. A bond that is rated AAA should trade in a similar price range to other bonds with similar characteristics and a comparable rating.

Joel M. Blau, CFP, is president and Ronald J. Paprocki, JD, CFP, CHBC, is chief executive officer of MEDIQUS Asset Advisors, Inc. in Chicago. They can be reached at 800-883-8555 or blau@mediqus.com
or paprocki@mediqus.com
.