A worker's Social Security benefits are reduced for each month that the worker starts getting the benefit before reaching full Social Security retirement age. The reduction is five-ninths of 1 percent of the primary insurance amount of that worker for each of the first 36 months before full Social Security retirement age, and five-twelfths of 1 percent for each additional month.Thus, if a worker retires exactly 36 months before reaching full Social Security retirement age, his benefit will be reduced by 20 percent (36 x 5/9 of 1 percent) of the PIA. If a worker retires 48 months before reaching full retirement age, the benefit will be reduced by 25 percent (36 x 5/9 of 1 percent plus 12 x 5/12 of 1 percent).

Example 1: Your client was born on Sept. 10, 1944. Accordingly, her full Social Security retirement age is 66. She plans to start receiving Social Security benefits when she attains age 62 in September of 2006, based on her own work record. Her PIA will be \$1,600 a month at that time. Since she will start receiving benefits 48 months before she reaches full Social Security retirement age, her benefits will be reduced by 25 percent of her PIA. Thus, her monthly benefit will be \$1,200 (75 percent of \$1,600).

Observation: The PIA is adjusted each year to reflect increases in the cost of living. The percentage reduction in an early retiree's benefits will remain the same when applied to the increased PIA. For example, if, in Example 1, your client's PIA is increased to \$1,640 for 2007, her monthly benefit for 2007 will be \$1,230 (75 percent of \$1,640).

Example 2: The same facts apply as in Example 1, except that your client was born on Sept. 10, 1943, and plans to claim Social Security benefits as soon as she attains age 63. Since she will start receiving benefits 36 months (three years) before she reaches full Social Security retirement age, her benefits will be reduced by 20 percent of her PIA. Thus, her monthly benefit will be \$1,440 (80 percent of \$1,800).

Example 3: The same facts apply as in Example 1, except that your client was born on Sept. 10, 1942, and plans to claim Social Security benefits as soon as she attains age 64. Since she was born in 1942, her full Social Security retirement age is 65 years and 10 months. Accordingly, she will start receiving benefits 22 months (one year and 10 months) before she reaches full retirement age, and her benefits will be reduced by 12-2/9 percent (5/9 of 1 percent x 22) of her PIA. Thus, her monthly benefit will be \$1,404 (87-7/9 percent of \$1,600).

Example 4: The same facts apply as in Example 1, except that your client was born on Sept. 10, 1941, and plans to claim Social Security benefits as soon as she attains age 65. Since she was born in 1941, her full Social Security retirement age is 65 years and eight months. Accordingly, she will start receiving benefits eight months before she reaches full Social Security retirement age, and her benefits will be reduced by 4-4/9 percent (5/9 of 1 percent x 8) of her PIA. Thus, her monthly benefit will be \$1,529 (95-5/9 percent of \$1,600).

Observation: The total gross Social Security benefits over the lifetime of a worker who retired between three to four years before full retirement age would be more than the total gross Social Security benefits of a worker with the same PIA who waited until full Social Security retirement age to retire, unless the worker who waited lived to about age 78.

If the early retiree retires two years before full Social Security retirement age, the worker who waited would have to live to be about 79 to receive the same total gross Social Security benefits as the early retiree. If the early retiree retires one year before full Social Security retirement age, the worker who waits would have to live to be about 80 to receive the same total gross Social Security benefits as the early retiree.

Example 5: Your client and his twin brother will be 62 in September of 2006. Each has a PIA of \$1,800 and a full Social Security retirement age of 66. Your client's brother plans to start collecting benefits as soon as he is eligible at age 62. Your client plans to wait until he is 66 to start collecting his benefits. The monthly benefit of your client's brother will be \$1,350 (75 percent of his PIA of \$1,800). For purposes of this example, let's assume that there will be no cost of living adjustments during the time that the brothers are collecting benefits. When your client starts collecting benefits at 66, he will collect a monthly benefit of \$1,800.

In the four years before your client starts collecting benefits, his brother will have collected total gross benefits of \$64,800 (\$1,350 x 48). Since your client's monthly benefit of \$1,800 will be \$450 more than his brother's monthly benefit of \$1,350, your client will have to live for 144 months after he retires (or until he is 78) for his total benefits to equal his brother's, i.e., \$64,800 (the amount that his brother received before your client started collecting benefits) divided by \$450.

No cost of living adjustments were taken into account in Example 5 in order to simplify the computations. However, even if there were cost of living adjustments, the result would be basically the same, since his brother's monthly benefit would remain 75 percent of what your client's benefit would be.

Observation: The choice of whether to take reduced benefits or to hold out for full benefits often depends on several factors. An individual who stops working may be forced to choose reduced benefits if she otherwise lacks sufficient resources to live on. On the other hand, even if finances aren't a problem, an individual with a comparatively short life expectancy (e.g., because of a known disease or illness, or based on family medical history) will benefit by choosing reduced benefits, at least if that individual is no longer working, or is working, but earning less than the amount that would cause him to lose all or part of his benefits.

Other key factors to take into account in determining whether to start receiving Social Security benefits before reaching full retirement age are the rate (if any) at which Social Security benefits will be taxed, and whether taking reduced benefits early will allow the recipient to delay taking money out of retirement accounts such as a traditional IRA or a 401(k) plan, and thus allow a tax-deferred build-up of amounts in those accounts to continue.

Spouses

The Social Security benefit of the spouse of a worker who claims benefits before full retirement age will be reduced for each month that the spouse starts getting the benefit before reaching the full retirement age. The reduction is 25/36 of 1 percent for each of the first 36 months before full Social Security retirement age, and five-twelfths of 1 percent for each additional month. Thus, if a spouse starts getting benefits exactly 36 months (three years) before reaching full Social Security retirement age, the benefits will be reduced by 25 percent (36 x 25/36 of 1 percent). If the spouse starts getting benefits 48 months (four years) before reaching full Social Security retirement age, the benefit will be reduced by 30 percent (36 x 25/36 of 1 percent plus 12 x 5/12 of 1 percent).

Example 6: The same facts apply as in Example 1, plus your client's husband, who was born on Dec. 10, 1942, will start getting a spousal benefit based on your client's work record at the same time as your client starts getting her worker's benefit. Since her husband's full Social Security retirement age is 65 years and eight months, he will not reach that age until August of 2007. Accordingly, by starting to receive a spousal benefit in September of 2006, he is getting benefits 11 months before reaching full Social Security retirement age, and his benefits are reduced by 7-23/36 percent (11 x 25/36 of 1 percent). Since the spousal benefit at full Social Security retirement age is 50 percent of the worker's PIA, your client's husband's benefit will be 92-13/36 percent of \$800 (half of your client's PIA of \$1,600), or \$739.

Widows and widowers

The Social Security benefits of a widow or widower of a worker who claims benefits before full retirement age are reduced for each month of entitlement between age 60 and full retirement age. The amount of the reduction for each month is determined by dividing 28.5 percent by the number of possible months of early retirement.

Thus, if the widow or widower's full Social Security retirement age is 66 (i.e., the widow or widower was born after Jan. 1, 1945), 28.5 percent is divided by 72 to get the monthly reduction. This formula causes the benefits of any widow or widower who starts getting benefits at age 60 to be reduced by exactly 28.5 percent, regardless of what that widow or widower's full Social Security retirement age is.

This is because the number of months before full Social Security age will exactly equal the number of months by which 28.5 percent is divided. Similarly, a widow or widower who starts getting benefits half way between age 60 and full Social Security retirement age will have those benefits reduced by 14.25 percent.

Example 7: Your client is a widow who was born on Sept. 10, 1943. Accordingly, her full Social Security retirement age is 65 year and eight months. This means that her benefit will be reduced by 28.5 percent divided by 68 (the number of months between age 60 and age 65 years and eight months) for each month that she starts getting benefits before age 65 years and eight months. She plans to start getting a widow's benefits based on her husband's Social Security record in September of 2006, when she will be 63. This will be 32 months before she reaches full Social Security retirement age.

Thus, her benefit (which at full Social Security retirement age would equal 100 percent of her deceased husband's PIA) will be reduced by 13.4118 percent (28.5 percent ÷ 68 x 32). If her husband's PIA if \$1,800, her benefit will be \$1,559 (86.5882 percent of \$1,800).

If a widow or widower's Social Security benefits are payable before age 60 because of disability, the benefits will be the same as they would be if the widow or widower started getting them at age 60 without disability, i.e., there is no further reduction in the amount of the benefits. This means that a disabled widow or widower who starts getting a widow's benefits before age 60 will have the benefits reduced by exactly 28.5 percent of the deceased spouse's PIA.

If a widow or widower was previously getting a reduced spouse's benefit for taking the benefit before full Social Security retirement age, the benefit will be recomputed after the worker's death based on the widow or widower's age at the time of the worker's death. Thus, there is no reduction for the prior entitlement as a wife or husband.

Bob Rywick is an executive editor at RIA, in New York, and an estate planning attorney.