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When should you take Social Security?

(MoneyWatch) When should you take Social Security? It's a question I get all the time, from in-laws, friends of my parents, and MoneyWatch readers. For most people, the answer is straightforward, if not popular: As late as you can, the closer to age 70 the better.

The reason is simple: The longer you wait, the higher the payout. Granted, this advice is useless if you can't afford to wait. But if you have any flexibility at all, it's important to consider the numbers. Last year, while doing research for my book, I was struck by the fact that, as interest rates fell, the "return" you get by waiting looks better and better. Over the weekend my former colleague Jack Hough, at SmartMoney magazine, pointed out that the case for waiting has gotten even stronger since then, as interest rates have continued to fall.

The easiest way to understand the issue is to look at the numbers:

If you are making $75,000 and you retire this year at age 62, your annual Social Security payout would be about $16,300 (that number will vary depending on your earnings over your lifetime). If you wait until your full retirement age of 66, your Social Security income in 2016 will be around $22,600. If you can hold out until age 70, expect to bring in more than $30,000.

Some people prefer a bird in hand, and they argue that you're better off taking the checks at age 62 and investing the money. Here's the problem: You would have to earn around 8 percent a year on your Social Security checks to match that payout. There's no investment in the world that pays 8 percent a year without a lot of risk. Despite all the fear over Social Security funding levels, the program has a U.S. government guarantee behind it, and even if you're skeptical of the Treasury, it's far safer than junk bonds that yield 8 percent.

Holding out for bigger checks becomes more valuable the longer you live. Using the numbers above, if you live to age 90 you'll get $170,000 more in Social Security by waiting until age 70 to take benefits. Of course it's great to have a bigger paycheck; it's also a nice form of inflation protection. The bigger your checks, the higher the dollar amount of any cost-of-living adjustments. Unless you're in ill health (and therefore may not live long enough to benefit) or simply can't afford not to take Social Security early, it's a no brainer.

The broader lesson here is what led to the name of my book: Worth It...Not Worth It: Simple & Profitable Answers to Life's Tough Financial Questions. While managing money is never easy, the answers to many of the questions we face are fairly simple, once you see the numbers. The same is true for life insurance, investing, and even whether to use your credit or debit card.

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