Financial Planning: When should you claim benefits?

I have a short article in Financial Planning Magazine which addresses some of the rules people use to decide when to claim Social Security benefits. I argue that the so-called 'break even age' approach that's often used by financial planners and the Social Security Administration isn't the best way to think about when to claim benefits. Some highlights:

The break-even approach is easy to understand. But it has three main flaws:

First, clients may live longer than they think. A 2005 British study found that retirement-age individuals typically underestimated their true life expectancies by three to five years. If the break-even age approach is used, it must be coupled with a realistic view of the probabilities of survival.

Second, the break-even age ignores benefits for a surviving spouse. Increased survivors' benefits are one of the best reasons to delay claiming, since widows have among the highest poverty rates of retirees. The break-even age approach makes what should be a household decision a purely individual one.

Third, and most important, the break-even approach treats delaying benefits as a gamble, when it should be seen as insurance against outliving assets. By focusing on average life expectancy, you ignore the significant chance of living longer than expected. While the typical 65-year-old will live to around age 83, one in four will survive to 90 and one in 10 to 95. There is a nearly 5% chance one member of a 65-year-old married couple will live to age 100.

Click here to read the whole article.