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

The Best Time to Claim Social Security? It Depends

Delaying 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.

Christine Benz: Hi, I'm Christine Benz for 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 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 until 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 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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