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By Christine Benz | 04-23-2015 03:00 PM

4 Pitfalls When Claiming Social Security

Retirees too often overweight break-even analyses, trap themselves with early claiming, and fail to strategize with their spouse, says retirement expert Phil Moeller.

Christine Benz: Hi, I'm Christine Benz for Morningstar.com. Social Security claiming strategies can be devilishly complicated. Joining me to discuss some of the frequent mistakes that investors make in Social Security claiming is Phil Moeller, he is the co-author of a new book about Social Security called Get What's Yours.

Phil, congratulations on the book. Thank you for being here.

Philip Moeller: It's my pleasure, Christine.

Benz: Let's talk about some of the key pitfalls. You deal a lot with individuals grappling with Social Security questions and problems; let's cycle through some of the key pitfalls that you observe while working with individuals. One of them, you say, is relying on break-even analysis to guide your decision-making--thinking about potentially investing Social Security proceeds. You say that individuals should actually think about Social Security more as an insurance policy.

Moeller: Absolutely. But I will say one of the strongest discussions we have with readers is this idea of a break-even analysis. It's very beguiling to think if you take benefits at 62 and invest them for eight years at a reasonable rate of return, you end up with a very nice pile of money and it would take you a long time to earn that money back in the form of higher benefits that you would get if you waited until age 70. So, when people look at these break-even ages of mid-80s or even older, they say, "Why should I possibly wait to take benefits?" Our feeling is that Social Security is the absolute best longevity insurance we have.

The payments are guaranteed by the government. It's maybe not what it used to be, but it's the best we have. They are inflation-protected. And the tax rate on Social Security is never more than 85% on your federal tax returns in terms of the number of dollars that are taxed. So, we think Social Security dollars are the valuable dollars and the ones you should really hold on to.

But because of gains in longevity, the average age of someone who is now age 65 is going to be in mid-80s--and later 80s for a woman. By the time people in their 50s are getting ready to retire, it could well be in the 90s. If you are a couple, the odds are very high that one of the two of you is going to live well into their 90s. So, as we say in the book--only partially tongue-in-cheek--your greatest fear in life isn't dying, your greatest fear is living to a really old age and outliving your assets. So, viewing this as longevity insurance, we think, is a good way of taking the best advantage of this great asset we have.

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