Financial planners have long used the "break-even age," the life expectancy where delaying retirement to claim higher benefits obtains the same return as retiring early, to counsel workers to claim Social Security at age sixty-two. Yet this approach gambles against living past the average life expectancy. Most retirees underestimate their own life expectancy and should work longer to "increase their insurance against falling short in old age."

Resident Scholar  Andrew G. Biggs

Making the right decisions regarding Social Security benefits is a crucial part of planning for retirement. Unfortunately, both financial advisors and the Social Security Administration itself often fail their aging clients.

Part of the problem is the challenge the SSA faces. The agency must act like a fast-food restaurant, serving thousands of customers each day in more than 1,300 field offices, with countless more through its 800-number. It must streamline and simplify its advice, so it can be passed on by ordinary employees and understood by ordinary Americans. On the other hand, the SSA is home to many of the nation's best economists and policy analysts. For them, dispensing advice to consumers is like McDonald's preparing millions of gourmet meals each day.

But it may be possible to combine the more sophisticated outlook of the analysts with the mass-market approach needed to reach millions of Americans-and financial advisors can help. This column--informed by my tenure of almost five years at the agency, mostly in its policy office--constitutes an attempt to do just that.

It's Better to Wait

Too often, people entering Social Security offices have been advised to start collecting benefits at 62, the earliest age possible. It's usually bad advice, and may put many retirees at risk of poverty in old age. Delaying claiming until age 70 can almost double a person's benefits.

Financial planners, as well as the agency, would also do well to abandon the "break-even age" analysis they've used for decades. This is the age at which total lifetime benefits beginning at a delayed claiming date would equal those received at an earlier claiming date. For instance, an individual eligible for a benefit of $758 at age 62 could receive a $1,000 monthly check by waiting until 65 and 10 months. Total benefits collected under the two scenarios would be equal at age 77 and 10 months--the break-even age. So an individual could choose when to claim benefits based on whether he or she was likely to survive to that age.

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.

By delaying claiming Social Security benefits, a worker effectively "purchases" more of the Social Security annuity. For low-income retirees, delayed retirement provides insurance against poverty in old age, when returning to work is no longer a practical option.

With the higher payment, a retiree wishing to leave a bequest can be more certain he won't need to dip into those funds if he lives longer than expected.

On average, there is no "best" age that maximizes lifetime benefits. But by delaying claiming, individuals can increase their insurance against falling short in old age.

Andrew G. Biggs is a resident scholar at AEI.