by Archie M. Richards, Jr., CFP^®
September 12, 2005

If you were born between 1943 and 1954, the age at which you can receive full Social Security retirement benefits is 66.

If you choose to start at age 62, the retirement income is reduced by 25 percent. Approximately 60 percent of U.S. workers elect to begin receiving reduced Social Security benefits at 62.

Which is better: the lower income at 62 or the higher income at 66? To clarify the answer, consider these two situations:

In the first case, you begin Social Security benefits at 66 and die only one year later at 67. The 1 year of full benefits is outweighed by the 5 years of reduced benefits you would have received by starting at age 62. In dying at only 67, you'd be better off starting the benefits earlier at the reduced level.

In the second case, you begin Social Security benefits at 66 and die at age 100. The 34 years of full benefits outweigh the 38 years of reduced benefits you would have received by starting at age 62. In living so long, you're better off waiting to start full benefits at 66.

How long do you have to live to justifying delaying the start of benefits to 66? The answer is, 9 years, to age 75. I provide an explanation here, but if you hate numbers, skip to the last two paragraphs of this section.

Assume full benefits of $10,000 a year at 66 and reduced benefits of $7,500 at 62.

You're comparing two hypothetical streams of income. The first is $10,000 a year for 9 years (ages 66 to 75). The second is $7,500 a year for 13 years (62 to 75).

To value a stream of income over time, you have to assume an interest rate. Financial planners generally use the rate for risk-free U.S. Treasuries. Call it 4.5 percent.

At that rate, $10,000 a year for 9 years is worth $72,688. This amount, invested at 4.5 percent a year, would produce $10,000 a year for 9 years with a zero balance at the end.

$7,500 a year for 13 years is worth about the same - $72,621. That amount, invested at 4.5 percent, would produce $7,500 a year for 13 years.

Age 75 is the crossover point. If you don't survive this long, you'd be better off having started reduced benefits at 62. If you live until at least 75, you're better off starting full benefits at 66.

Naturally, you don't know how long you're going to live. Sixty percent of Americans choose not to take the risk of living to age 75. They prefer the bird in hand and start the reduced Social Security retirement benefits at 62.

Marty writes, "My uncle passed away and left $10,000 to my two-year-old granddaughter. I just received the money as custodian. My granddaughter lives in Texas with my daughter and son-in-law. I live in Kansas, and the custodianship is under the UTMA laws of the State of Colorado. Would a 529 plan be the right course?"

Yes, Marty, a 529 plan under the Uniform Transfers to Minor Act of Colorado is the way to go. You control the disbursements until your granddaughter attains age 21. Under Colorado's UTMA rules, she can then take outright ownership.

To cover the possibility of your dying or becoming disabled prematurely, designate someone else (your daughter, for example) as successor custodian.

529 plans are taxed favorably. The money grows tax free, and withdrawals for approved college costs incur no tax.

Vanguard's 529 plans are lower-cost than most such plans. Call 800-523-7731. I suggest putting half the money into the Vanguard Total Stock Market Index Fund and the other half into the Vanguard Total International Stock Market Index Fund. Later, after the account values have grown, move 20 percent into the index funds of long-term bonds and another 20 percent into the index fund of real estate invest trusts.

529 plans are the best way to accumulate money for higher education.