the best time to claim social security

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By Christine Benz | 08-23-2012 10:15 AM

The Best Time to Claim Social Security? ItDependsDelaying Social Security benefits until age 70 offers the best return for

retirees, but there are instances when it's helpful to claim as early as

possible.

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Christine Benz: Hi, I'm Christine Benzfor Morningstar. Deciding when to claim

Social Security benefits is a hugely

complicated process, and it's

compounded when you're trying to plan

for two spouses. Joining me to share

some recent research into this area is

David Blanchett. He is head of

retirement research for Morningstar

Investment Management.

David, thank you so much for being

here.

David Blanchett: Thank you for having me.

Benz: David, you took a look at optimal ages at which to claim Social Security.

This is obviously a very complicated topic. There have in fact been new software

tools that have popped up to help seniors make sense of this decision-making. Let's

first cycle through some of the key factors that should go into making a good

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decision about what age to claim benefits.

Blanchett: First, this is one of the most important decisions for most retirees. I

would advise anyone that's thinking about when to claim benefits to spend a lot of

time on this. This is a very, very important issue. There is a lot of kind of unique

considerations with Social Security. There is your health; how much you expect to

earn if you're married; what your income is from other assets; your portfolio; how

you plan to invest. There are all these kinds of unique considerations that make it

kind of really hard to figure out what's best for everyone. Every person is different

in terms of what is the best approach for each individual.

Benz: Whether you plan to continue to work is also in the mix.

Blanchett: Correct. Because if you claim early, [the Internal Revenue Service] can

tax your benefits. There are all these very complicated rules involved with figuring

out what is the best time to claim your Social Security.

Benz: And one of the biggies is truly unknowable, that's your expectation of your

own life expectancy, because if you have some knowledge that you'll have a much

longer-than-average life expectancy, delaying is the better strategy.

Blanchett: Yes. It's like any annuity. The longer you're going to live, the more the

annuity pays off.

Benz: Ultimately, you concluded, as some other researchers into this area have,

that many people would be better off waiting at least until their full retirement

age, possibly even until the latest possible age which is 70, to claim benefits. Let's

talk about what factors you determined in your research that point to delaying as

being a good strategy.

Blanchett: When you think about Social Security claim age, when you can start

receiving benefits, most people over the next five years, their full retirement age is

age 66. The earliest they can claim is age 62. You can actually claim past age 70,

but there is no benefit to doing so. So, if you wait unti l 70, you should definitely

claim because you don't increase the benefit past age 70.

So the question is, "What age should I claim my benefits?" If you delay from age


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Close Full Transcript

Benz: One other point that you made that I think is really interesting, David, is

that seniors sometimes experience cognitive decline, and that would argue against

one of the reasons that people say sometimes you should take it as soon as

possible that you can take that money and invest it. Let's talk about your thesis

there.

Blanchett: Every study for the most part on Social Security talks about investing

the difference. So if you claim at age 62, you'll get some extra income that you

wouldn't get if you waited until age 66. You're going to invest those monies and

then make up the difference in income over your life span. And I think that's a

good idea; it's a good concept.

The problem is that investors' abilities to make good decisions declines as they age.

So Social Security is a guaranteed inflation-adjusted annuity. And I think that's

very viable for someone who is age 90 or age 95 who really doesn't have the

ability to know what is a good investment, how should I be investing, or what can I

actually afford to take out from my portfolio. So transferring money into anannuity I think is better the older you are for a host of reasons.

Benz: Lets talk about the thesis behind claiming earlier. In what scenarios would

that strategy make sense? What would you want to have in your profile that would

make that an effective strategy?

Blanchett: I think the number-one reason for someone to claim earlier is if they

need to retire and they don't have savings at all. So if you are age 62 and you

simply have to retire, you have no other savings, you have no choice. You can't

choose to delay because you can't fund that with your saved assets. So that would

62 to age 70, your benefit increases by 72% or 76%, but the problem is you have

to fund income for that eight-year period. What I found was that Social Security is

a very valuable benefit that is effectively an inflation-adjusted annuity, and the

longer you can wait, the better off you usually are because it's really hard to

replicate that kind of income with a portfolio.


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be the person in my opinion who is ideal to claim early, or [it could also be]

someone who is unhealthy. Delaying benefits is smart if you are going to live to

age 85 or 90, but if you're going to live to age 75, you should probably claim as

early as possible.

Benz: Last thing I want to touch on, and this opens a whole other can of worms,

but spousal strategies for claiming Social Security. It's complicated enough for one

person to figure out what to do, and it's even more complicated when you have two

spouses, oftentimes of different ages, oftentimes of completely different earnings

history. You've got maybe one spouse with a lot of earnings over his or her

lifetime, the other one with fewer. Let's talk about some of the variables there and

some of the key things that spouses should keep in mind when attempting to figure

out the right age to claim benefits.

Blanchett: So a spouse's benefit is not affected by when the primary worker

claims their Social Security benefits. It's basically when that spouse claims the

benefits. The key benefit for the spouse is the spousal survivor benefit. When the

primary worker passes away, the spouse is entitled to a benefit amount that is

equal to the either primary worker's benefit or their benefit whichever is greater.

So if the spouse has a smaller benefit, they get kind of an increase in their benefit

when the worker passes away, and that can be significant for someone who didn't

work or who is very young. So if your spouse is eight years younger, for example,

and you're the primary worker, then if you pass away, the additional income your

spouse can receive from your delaying benefits can be significant because the base

spousal benefits is half of the primary worker's benefits. So your spouse's benefit

can increase by a 100% or more by delaying past age 66 to age 70, for example.

Benz: If you have a much younger spouse, a good rule of thumb is to, if you

possibly can, put off the receipt of that benefit because your spouse's benefit

hinges on when you do your claiming.

Blanchett: Yes. Obviously the spouse will only receive that benefit if they outlive

you, but there is still a definite benefit there if their benefit is a lot smaller than

yours and they are a lot younger.


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Benz: Let's discuss the thinking behind another common strategy called file and

suspend. What goes on there, and where can that strategy make sense for people?

Blanchett: I guess my comment on that is there are lots of very complex, nuanced

things you can do with Social Security. And if you're thinking about doing [file and

suspend], I would highly recommend talking to a financial planner and get all the

nuances in [such as strategy] correct. But the idea is that you can go ahead and

start receiving benefits for your spouse and then get your full benefit later. So you

can file and suspendbenefits. You used to be able to actually claim benefits early

and then say, "Wait a minute, I'm going to change my mind and pay them back."

There was actually legislation back in 2010 that you can't repay benefits anymore.

So Social Security is kind of an ongoing complex decision that is always changing.

Benz: Well, David, thanks for sharing your research. This is such an important

area and as you say, such an important component of so many retirees' plans. It's

good to hear some concrete strategies.

Blanchett: Thank you.

Benz: Thanks for watching. I'm Christine Benz for Morningstar.

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kensmiles

Aug 29 2012, 7:38 AM

"...investors' abilities to make good decisions declines as they age."

While this is frequently true, there are usually relatives or

professionals available to help. I don't see how cognitive decline

should be an issue in most cases.

mws17

Aug 29 2012, 9:14 AM

Thanks for an excellent discussion regarding an exceedingly complex

issue.

pbyrley

Aug 29 2012, 10:08 AM

I'll read it in a minute but, I gotta say, it's really getting confusing

... right up there with where to put the safe part of my retirement

portfolio. Thank goodness I cant tinker with my Federal retirement

(CSRS annuity) pension - before TSR.

retiredgary

Aug 29 2012, 11:50 AM

There is another reason to take the money at 66. RMD's on

retirement plans kick in at seventy and a half. By starting SS at 66,some people who do not need withdrawals from retirement plans to

cover expenses can have several years of lower taxes by collecting

SS and paying taxes on a much lower portion of it than would be the

case after RMD's push their taxable income and the taxes they pay

on SS up.

NormanR

Aug 29 2012, 12:10 PM

Yes, this is a difficult thing to figure out.

In my case, I 've decided to take the money at FRA and use it to

offset withdrawals from my retirement accounts. In other words, I

will withdraw less from those account by using SS to offset them. So

I'll have more money working for me in my retirement accounts, for

which I make the decisions. Alternatively, I could have delayed SS

benefits to 70 with the hope and prayer that the government

operates in a manner which is to my benefit. In other words, taxing

workers, and passing the proceeds to me, a retiree. Somehow, I

don't think that's the way this scenario is going to play out.

"What I found was that Social Security is a very valuable benefit

that is effectively an inflation-adjusted annuity, and the longer you

can wait, the better off you usually are because it's really hard to

replicate that kind of income with a portfolio."

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Yes, it is difficult to replicate. But I'd suggest any reader also

consider the benefits of working a year or two longer while saving

what they can while delaying SS benefits.

In my case, I'm working part time and I'll be maxing out my Roth

IRA while I work and while I collect SS benefits. Yes, there may be

an income tax hit. But that's one of the things about this perverse

system. Collect from the SS "trust fund" and pass a portion to the

government via income taxes, so they can flush it on pork projects,

etc.

NormanR

Aug 29 2012, 12:15 PM

@kensmiles

Yes, there are "usually relatives...available to help." But the

statistics about family members who take advantage of seniors is

very disheartening.

My advice to seniors of which I am one is simple "trust no one." It'suseful to remember that greed is one of the most powerful forces in

human beings.

FidlStix

Aug 29 2012, 1:03 PM

I started S S at 66 instead of waiting 'til I'm 70 (I'm now 69 and still

working full time) partly so I could continue funding a Roth at the

max $6K / year. The Roth has returned 10% per year in the 5 1/2

years since I started it. Last year, 11.8%. So far, so good - at a

10% gain in the next 12 months, it'll return about $4,700 - pretty

close to parity with the increase in S S I would have gained by

waiting 4 years to claim.Of course, that extra 21% from S S is a fairly sure thing, while 10%

from the Roth going forward is far from sure . . .

cgajowski

Aug 29 2012, 1:55 PM

It is fairly easy to "decide" to claim Social Security if you are eligible

and have no other source of income; it is also easy to decide to

delay if you are working, have a high probability of a long life, and

would lose a lot to taxes ,so might as well wait until maximizing it at

70. And if you are a part of a married couple you can essentially

game the system as advised here and in other articles to get the

most. It's in- between, and for single filers where there's more to

consider.

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The Best Time to Claim Social Security? It Depends http://www morningstar com/cover/videocenter aspx?id=565732


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I anticipate living past 90, barring accidental death.... What i cannot

seem to figure out is - as someone not earning income at this point

(65)- whether it is better to use SS for life expenses beginning at 66

or 67, and retain savings ( at least the Roth part) as long as I can,

or to use as much of the Trad IRA as need be to delay taking SS

until 70. And I have checked out different scenarios,

As far as the question of becoming so demented that I won't be able

to make good decisions -- not quite yet, thank you. Although I was

perfectly capable of making bad decisions when a lot younger --- Did

it occur to Mr Blanchett that there are a lot of seniors who are

utilizing MStar because we continue to be investors of our own

retirement savings? And will stay invested - must be invested - as

we expect to be kicking around in 20-30 years? Plus - an unpopular

topic - so if you are "cognitively disadvantaged" how are you going

to evaluate the performance of an advisor? Anyway, it is true that

sometime down the road this will likely become harder or

impossible... and I still do not know that the best solution is to rushto set up an annuity. It is akin to the decision about Long term Care

Insurance... murky waters.

polkster0

Aug 29 2012, 2:06 PM

If delaying benefits until age 70 offered the best return for most

retirees, the actuarials who design the intricate rules governing SS

retirement benefits would be screwing up. The goal is that the

amount paid out will be the same no matter when you start drawing

benefits. Delaying "withdrawal" until age 70 will usually result in the

largest monthly payment (assuming you live to age 70). (I use

quotes on withdrawal, because the language of contributions,

withdrawals and the like are polite fictions.)

In any event, delaying the withdrawal date will increase the monthly

payment (if you are alive to receive the monthly payment), but on a

statistical basis, is not likely to increase your total return.

Studies have shown that most Americans greatly overestimate their

life expectancy. (I know that most Morningstar subscribers are the

type of folks that are trying to plan for every possible contingency.

The possibility of living to 120 must be considered, after all.)

The statement that, on average, folks now 65 will live another 20

years is misleading. Its not like most of those 65 year olds will still

be alive 20 years from now, and suddenly they'll all die. Rather, half

of them will die before 20 years have passed, with a significant

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percentage dieing off each year until then.

Consider if SS changed the rules, and removed 70 as the limit for

monthly benefit payment increases in exchange for delaying

withdrawal (the actuarials could calculate this out to any age). So,

let's say you could delay benefits until age 110, but then receive

$100K/mo. Such a deal! Great insurance in that worst case scenario

where you live to be 120.

bobk47

Aug 29 2012, 7:28 PM

Polkster is right about total payouts on AVERAGE not being affected

by the age SS is taken because that is how the actuaries do it.

However, you as an individual do not care about averages. You

have to take into account your situation. If you consider your

biggest risk is longevity then you are best to delay taking payments,

but this is only one factor and it may not be the most important to

some. I say this with some tongue-in-cheek, but since SS is pretty

much on a pay-as-you-go basis now (in other words payroll taxes

withheld pretty much equal payments to seniors) I felt we might

want to start receiving some benefits early because we have three

kids paying into social security. Might as well be us collecting themoney. After all, the government just transfers the money from one

group to another so at least this way some of the benefit my wife

and I are getting we can pass back to the kids (without using the

government as the transfer agent).

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