A retirement mistake Boomers should avoid

NEW YORK (CNNMoney.com) -- Of all people who apply for Social Security retirement benefits every year, the number doing so before their "full retirement age" has been on the rise. For some, that move is going to cost them money.

It's not that people are retiring earlier than they used to - in fact, statistics show we're working a little longer. But the age at which you can collect full benefits keeps getting pushed back.

In 1999, when 65 was the full retirement age, 66 percent of men and 71 percent of women applying for Social Security took early benefits. By 2005, when full retirement age had risen by one year to 66, a full 85 percent of men and women applying for Social Security took early benefits.

The question of when to start collecting Social Security is particularly relevant for Baby Boomers, the oldest of whom will turn 62 next year. That's the first year when you can opt to take Social Security benefits - albeit at a reduced level.

"If you retire early, you permanently reduce your benefit," said Ron Gebhardtsbauer, senior pension fellow with the American Academy of Actuaries. On the other hand, you also collect benefits for a longer period of time than if you waited until full retirement age.

Taking a smaller benefit early can pay off if you don't live past what's called your "break-even" age - the point at which the cumulative value of your early retirement benefits is trumped by the money you would have been paid had you waited until full retirement age.

Say you want to retire at 62 and would draw a Social Security benefit of $1,125 a month. That's 25 percent less than the $1,500 you would collect if you waited until age 66.

By age 77 and 11 months (let's call it 78) you'd have collected roughly $216,000 in total benefits, whether you opted for early benefits ($1,125 x 192 months from ages 62 until 78) or full retirement age benefits ($1,500 x 144 months from ages 66 until 78). (Here's the Social Security Administration's break-even calculator, which can do the math for you up to this point.)

But your break-even age is actually later when you factor in the investment value of your early benefits. Even if you don't invest those early benefits directly, taking them might mean you can leave other savings to keep growing. That could add three to five years to your break-even point, Gebhardtsbauer estimated.

So in the example above, if you think you'll live past 81, it may pay to wait until full retirement age to start collecting.

Gebhardtsbauer estimates that a husband and wife, each 65 in 2007, have a nearly 100 percent probability of one or both living to 70 and an 81 percent probability of living to 85. They even have a better than even chance (58 percent) of one or both making it to 90.

Don't just rely on the break-even calculation when deciding when to take Social Security. "There are so many other factors in deciding when to retire," Gebhardtsbauer said.

For instance:

Your finances and your health: Waiting until full retirement age or later isn't an option if you're unable to work. Nor is it a smart move to wait if you don't have substantial savings to live on in the meanwhile.

Your tax situation: Keep in mind that the reduced benefits you'd receive if you start collecting early may be even lower on an after-tax basis than you're expecting.

If your annual income in retirement from all sources exceeds $25,000 ($32,000 for joint filers) you will owe income taxes on a portion of your benefits. You'll owe even more if your income exceeds $44,000 ($54,000 for joint filers).

More and more people will be subject to the tax since the income thresholds are not adjusted for inflation, unlike your Social Security benefits, which are.

Your benefits may be reduced even further because Medicare premiums, which are paid out of your Social Security check, have been rising faster than inflation.

Your plans to work in retirement: If you take a job that pays more than $12,960 in retirement while collecting benefits, your benefits will be reduced by $1 for every $2 earned above that threshold unless you are past your full retirement age, Gebhardtsbauer said.

On the bright side, after you reach full retirement age, you will get an increase in your Social Security check to reflect the amount of benefits withheld while you were working.

Plus, no matter how much you earn after full retirement age, you will not have any benefits withheld.

How long you've been in the workforce: Social Security benefits are calculated based on your 35 highest earning years. So if you've logged less than that - say you took several years off to raise kids - you might want to work a few extra years before full retirement age to boost your benefits.