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Wrong Question Brings Lower Social Security Payout

NEW YORK (TheStreet) -- The basics of Social Security are pretty simple: The longer you wait for benefits, the more you get. Live past your government-projected life expectancy and those bigger benefits really pay off.

For every dollar you would be entitled to get at 66, you'd get just 75 cents by starting at 62, or $1.32 by waiting to 70. Any optimist would therefore be wise to postpone benefits until they max out at age 70.  Starting early makes sense for only two groups: those expecting to die young and those who must have the money.

But not many people do the logical thing.

"In fact, half of all Americans claim Social Security benefits at age 62 or within two months of stopping working, while just 2% wait until 70, the age at which monthly benefits are maximized," says Morningstar, the market data company.

To find out why, Morningstar asked Suzanne Shu, an assistant professor at UCLA's Anderson School of Management who has studied the question. A key element, she says, is a person's expected lifespan. While no one knows just how long that will be, people's best guesses, or wishes, can vary dramatically according to something as simple as whether they are asked what age they will "live to" or will "die by."

Shu said that "the median life expectancy was 75 years old in the 'die by' frame, and 85 years old in the 'live to' frame." In other words, the typical person has not really tried to pin this number down.

Unfortunately, the optimists do not make adequate adjustments. Those expecting to live 10 years past their life expectancy typically delayed the start of Social Security by only six months. As a result they get far less than they could, assuming they do have the extra decade.

People also have a strong sense that after decades of paying FICA taxes, they own their benefits and want to get their hands on them, she says. That's strengthened by a fear of dying early and not getting what they deserve.

Among the potential ways to counter this self-defeating behavior would be an attempt to get the worker to focus on the sense of loss he or she might feel later from getting a benefit that could have been much larger, Shu says.

Of course, figuring the life expectancy of any individual is impossible -- the government's tables are averages. Still, barring accident, a risky lifestyle and bad luck, your health and family history can shed some light on the odds of living long.

And, in deciding when to start benefits, it can pay to look at the numbers you actually can nail down, such as the size of benefit you'd get at different starting ages and the total you'd get if you lived a given number of years after that. The Social Security Administration has a number of calculators for making sense of these issues.

Keep in mind that if you start benefits before your full retirement age, the monthly payment will be reduced by $1 for every $2 you earn above $15,480, or $1 for every $3 earned in the year of your full retirement age. That deduction is added back to the pool you'll draw from later, so it's not really lost if you live long enough. Still, if you're not planning on a true retirement, this is another reason to postpone the start of benefits.

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