In 2010, the first baby boomers turn 64. Millions will follow into and through their seventh decade in the next few years. Therefore, many financial planning clients soon will reach the point where they want to know, "When should I start my Social Security benefits?"

Often, sexagenarians make questionable choices. "The overwhelming majority of individuals claim as soon as they are eligible, or shortly thereafter," says Tony Webb, associate director of research at the Center for Retirement Research at Boston College. "Assuming that the money is not absolutely needed, most people should wait at least until age 68. Often, they should wait until age 70." That is, many seniors start to receive Social Security benefits close to the earliest time possible (age 62), when they might be better off waiting until the latest possible time (age 70).

Clients get more money if they wait to claim Social Security benefits, which makes it appealing. However, a closer look shows the decision is not that cut and dried. A more nuanced approach is to start by calculating the breakeven point for waiting. Many factors, including marital status, investment growth rate, inflation and tax rates, play a role in determining when clients should begin taking their checks from Uncle Sam.

PATIENCE IS A VIRTUE

Why should clients delay starting Social Security? Because the longer a client defers benefits, the greater each check will be. For clients now, the "normal retirement age" is 66. Clients who defer benefits get a "delayed retirement credit" (DRC) for each month they wait. This DRC amounts to an 8% increase each year, or a 32% increase for clients who wait for four full years, from age 66 to age 70.

For example, a senior who starts this year at age 66 and qualifies for the maximum Social Security benefit receives a monthly benefit of $2,346 in 2010, or $28,152 a year. By waiting until age 70, that annual benefit would be $37,161-approximately an extra $9,000 a year. That extra benefit would go on indefinitely, as long as the recipient lives; if this senior has a surviving spouse who did not qualify for the maximum benefit, the extra $9,000 annual benefit would be paid for the rest of her life, too.

The math is similar for clients who consider starting benefits at age 62. By waiting four years, until normal retirement age, they increase their benefit by 33.33%. However, this analysis is complicated by a withholding of benefits for people who have significant amounts of earned income from age 62 until age 66. "Virtually any worker who anticipates earning more than the threshold amount before the year in which the individual reaches normal retirement age should delay benefits," asserts Michael Kitces, director of research for Pinnacle Advisory Group, a wealth management firm in Columbia, Md.

Back in 1983, when the DRC was raised from 3% to 8%, an 8% annual boost might not have seemed significant. Treasury-bills returned nearly 9%, while short-term bank CDs paid as much as 9.5%.

In today's world of scant yields from safe investments, an 8% annual increase for four years may be hard to pass up. "Where else can you get 8% these days?" asks Eric Wikstrom, founder of Integrated Wealth Strategies in Mercer Island, Wash.

BREAKING EVEN

Planners and clients may not be content to wait until age 70 for Social Security and thus add 8% a year to the future income stream. Instead, the typical approach is to look at a "breakeven" point and estimate whether a pensioner is likely to get there. A hypothetical client who gives up $28,152 a year for four years starts out more than $112,000 in the hole by waiting until age 70-that's the money he or she could have received but decided to forgo.

At an extra $9,000 a year, it will take more than 12 years to make up the shortfall. Counting the time value of getting that $112,000 four years earlier, Kitces calculates that the breakeven point for waiting until age 70 could be anywhere from 15 to 50 years, depending on the imputed growth rate of the money received.

If someone starts at age 70 and has a 20-year breakeven, for instance, he or she would have to live beyond 90 to make deferral worthwhile. Many clients would not find that to be an acceptable tradeoff. However, Kitces explains that breakeven analysis should consider more factors, such as marital status, investment growth rate, inflation and tax rates.

Marital status. Many sixtysomething financial planning clients are married. "Many married clients are concerned about leaving ample income for a surviving spouse," Kitces says. For such clients, it's the joint life expectancy that's relevant.

A 70-year-old client might not live to reach 90-plus, but there's a much greater chance that his 65-year-old widow will top age 85, perhaps by 10 or even 20 years. A surviving spouse often will receive the Social Security benefit of the first spouse to die, so delaying receipt of benefits commonly increases a widow's pension substantially.