A lot of Answer Desk readers approaching retirement — including more than 70 million baby boomers — are stumped when it comes to a key question concerning Social Security benefits. Greg in Pennsylvania is wondering: is it better to start collecting early — even though the check is smaller — or wait until the full benefit kicks in?
Is it better to take Social Security at 62 and use retirement money, or wait until 66 and use all retirement money until then?
— Greg, Pittsburgh, Pa.
Unfortunately, there is no one-size-fits-all answer for this one. The sliding scale used to calculate benefits — paying you a smaller monthly check if you retire “early” and more if you wait longer — depends on the year you were born. Your lifetime payout depends on how long you live. And if you work after your retirement age, you may have to give some of your benefits back.
So the first step is to go to the Social Security Administration's Web site and find out when you’re entitled to full benefits.
For those born between 1943 and 1954, for example, you can start collecting benefits at age 62, but you’ll only get 75 percent of what you’d get if you wait until you’re 66. If you wait until 67, you get 108 percent of your monthly benefit. And at age 70, you’ll collect 132 percent — the maximum you can get by delaying benefits.
But your total lifetime payout depends on how long you live. The average life expectancy in the U.S. in 2003 was 74.8 years for men and 80.1 for women, or 77.5 for both sexes, according to the Centers for Disease Control and Prevention. If you make it to 65, your life expectancy rises to an average of 83.4 for both sexes. So let's assume you’ll live to be 77.5. (Of course, as they say, your mileage may vary.)
Now, let’s say you’ve got $1,000 a month coming to you at age 66. If you start collecting at 62, you’ll collect $9,000 a year for 15.5 years for a total of $139,500 in constant dollars (that just means not adjusted for inflation.) If you wait until 66, you’ll get $12,000 for 11.5 years, or $138,000 — about the same as if you started collecting early. On the other hand, if you assume the longer life expectancy of a 66-year old today, you could expect to collect for 17.4 years, which makes for a lifetime payout of $208,800.
So far, so good. But if you decide to collect at 62, and you keep working, you’ll need to account for the “earnings cap” — which was $12,480 for 2006. For every $1 you make over that limit, you have to give back 50 cents of your Social Security check. The earnings cap goes away at 66. So if you plan to keep working, starting your benefits at 62 may not be such a good idea.
In the end, since you don’t know how long you’ll live, your decision will likely have less to do with maximizing your total payout and more with your personal retirement plan. Collecting early means locking in a lower payment for the rest of your life – and for your spouse if they survive you.
So some people may prefer the security of collecting a bigger check. On the other hand, if you need the money at 62, you may be better off collecting early and letting your tax-deferred savings and investment continue to accumulate returns.
Why has tuition in college risen in the last years? Is this trend going to continue? And why the government is not doing anything to help us to pay for our studies?
— Siraj B., Fort Lauderdale, Fla.
Tuition is rising because the costs of providing your education — from professor salaries to the heating oil needed to keep the dorm warm in — is rising. But, somewhat mysteriously, costs have been rising faster on college campuses than everywhere else. One could argue that tuition is rising because demand is strong for college education and students (and their parents) have no choice but to pay it. Demand will remain strong as long as people with a bachelor’s degree earn more — by one estimate as much as 62 percent more on average — than those with only a high school diploma.
And yes, it's going to continue. Between 2000 and 2004, tuition at public, four-year universities rose by 32 percent — to $11,441, according to a report prepared this summer by Senate Democrats. At private four-year colleges, during the same period, the increase amounted to 21 percent to 26,489. (And during that period, overall inflation — as measured by the Consumer Price Index — rose a little less than 10 percent.)
The rapid rise in tuition is a big reason that, between 1993 and 2003, the average student debt more than doubled to $17,400. But despite the rising costs and bigger debt loads, Congress earlier this year cut some $12.7 billion in federal student aid — the largest cut to federal financial aid in history.
With two kids in college, we wish we knew why our government didn't do more to help. Today college students are going to compete in a global job market against workers from other countries that are willing to invest more in preparing the next generation for the workforce. From where we sit, our nation's policy toward education — from K-12 through graduate school — is miserly and short-sighted.
I have a home equity loan with a balance of approximately $19,500. The interest rate is 7.1 percent. I have a credit card with a rate of 3.9 percent good for the life of the loan. I would not use this card for any purchases. Am I better off to transfer the home equity loan balance to the lower APR or is it pretty much a wash?
-- Dave A., Delphos, Ohio
If the 3.9 percent rate is truly fixed for life, go for it. But such an offer is highly unusual. Go back and read the full credit agreement (the fine print) and be sure you haven't overlooked terms that allow the rate to rise in the future.