From the July 2007 issue of Boomer Market Advisor • Subscribe!

Boomer security or financial deprivation?

There is a key financial decision that most people mishandle, one that financial advisors do not pay enough attention to. When should the client start taking Social Security benefits, and when should the spouse start taking Social Security benefits? The difference between a good decision and a poor decision is stark, and can make the difference between lives ended in financial security and lives ended in deprivation.

I recently went on the Social Security Web site and used the quick calculator to find out how much my Social Security benefit would be if I took it as soon as I was eligible, when I turn age 62 in 2008. The answer was $18,240 a year. I then calculated how much I would get if I waited until 2015 to start taking benefits and the answer was $38,940 per year. This was certainly a startling difference. And this does not include the impact on spousal benefits. Just as the benefit of a person retiring at age 62 (and born between 1943 and 1954) gets only 75 percent of the full benefit, the spouse of that early retiree is guaranteed just 35 percent of that benefit, not 50 percent.

Most people don't even know the age at which they're eligible for full Social Security benefits. In a survey my organization conducted in 2006, we found that only 19 percent of the public could correctly identify the earliest age they could collect full benefits.

Forty-eight percent guessed too early, 9 percent guessed too late and 22 percent could not even hazard a guess. I'm sure most people do not know the extent to which the Social Security system penalizes people who take benefits early and pays additional benefits to those who wait beyond normal retirement age. As a result, most clients do not know the optimal time to start taking Social Security benefits.

Many people reach age 60 woefully unprepared for retirement. They then turn to financial advisors for miracles. You cannot, or at least should not, manufacture money, but a smart Social Security strategy can produce higher levels of income. Developing this strategy demonstrates the value you bring to your clients.

There are, of course, two factors that make the Social Security decision especially important. First, Social Security is indexed for inflation: A higher base means higher increases. Second, Social Security is an annuity that makes payments for a lifetime, and a spouse's lifetime. The higher benefit is key for those who live long. And, as people age, Social Security becomes an increasingly larger share of their income. The Employee Benefit Research Institute has estimated that people ages 65-69 currently get 50 percent of their income from the annuitized sources of Social Security, defined benefit plans and life annuities. But those ages 85 and over get 80 percent of their income from these annuitized sources; most of it is from Social Security.

A key part of the decision about when to take benefits is the "break-even analysis." For example, the break-even age is 79.7 for those who wait until age 69 to start benefits. But men who start benefits at that age have a 70 percent chance of reaching the break-even age and women have an 80 percent chance. The discussion of this break-even point could be very useful. It will help you understand your clients' sense of how long they will live and the extent of their present vs. future orientation. Knowing these viewpoints will help you work more effectively with them.

To most clients, the information you provide will be new. People like to maximize the value they derive from any program, especially one that they have paid into their entire working lives. But more importantly, Social Security does provide a foundation for most retirement programs, and it will be reassuring for clients to know they have a floor of income to build upon.

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