When to Claim a Pension : The Effect of Uncertainty in Ages at Death

When should you claim a pension (such as Social Security) in the US? Much current advice focuses on the increase in the annual pension benefit as individuals delay claiming a pension, an increase due to the actuarial fairness of the system. However, individuals face two risks: whether they live to the planned claiming age, and how long they live after they claim. Here we show that for both individuals and couples, the coefficient of variation of the (combined) lifetime benefit, calculated as the ratio of the standard deviation to the average, increases as individuals/couples delay claiming, indicating a rising risk relative to benefit. We use a utility analysis to find an optimal portfolio under different risk aversion levels. We conclude that individuals and couples should consider both average benefit and risk when deciding on a claiming age, as with other investment decisions