As advisors know – an increasing amount of clients are aware of this as well – Social Security eligibility comes with a decision making process. Typically, the big decision regards when to claim those benefits and the answer isn’t the same for all clients.
Under the current guidelines set forth by the Social Security Administration, 62 is the earliest age at which recipients can take benefits and 67 is the age at which full benefits can be received, though that decision can be postponed up to age 70.
Advisors know that this decision isn’t uniform. While there is clear value in waiting – the long a client waits to claim Social Security, the great the benefits – some clients don’t have that luxury. While claiming Social Security at 62 years old results in reduced benefits for the recipient, it may be an appropriate strategy for clients that are behind on retirement savings and/or those that are still working, but aren’t big earners.
Obviously, Social Security is a topic that’s highly relevant to older clients. However, a confluence of factors, including questions regarding when is the right time to claim these benefits and the viability of the system, it’s worth it to address Social Security with clients in their 40s.
Decisions, Decisions
Something else advisors know is that the decision on when to claim Social Security Benefits is like any other investment choice in that it’s rooted in math. Thing about math is it cannot be argued with.
“Starting to collect at the earliest possible age of 62 provides 70% of the retiree’s earned benefit; delaying to age 67 confers 100%; and postponing until age 70 creates a bonus, boosting the percentage to 124%,” notes Morningstar’s John Rekenthaler. “These amounts are fixed, save for the inflation adjustment that is applied to all Social Security disbursements. That is, the 62-year-old recipient will collect 70% of the full benefit for the rest of their life, while the retiree who holds out until age 70 will receive 124%.”
He lays out another good example advisors may want to consider using with clients. I’ll paraphrase here. Assume a client’s full Social Security benefit, or what they’ll receive if they claim at 67 years old, is $2,500 monthly or $30,000 annually. By claiming at 62, that benefit declines to $21,000 and by waiting to 70, it’d swell to $37,200. Those are meaningful differences.
“Most experts who analyze the Social Security program conclude that retirees should at the least wait until their full benefit age of 67 before receiving Social Security and perhaps delay until age 70,” adds Rekenthaler. “That is a reasonable conclusion. However, the general advice does not apply to all.”
Evaluating Exceptions
Waiting until 70, or at the very least, 67, should be the “rule” when it comes to Social Security, but most rules have exceptions and that’s true in this case. One exception is political in nature. Put simply, the U.S. national debt resides at a record $32 trillion and with politicians from both parties seemingly unwilling to halt spending, a time may come that they have no choice but to slash entitlement benefits.
That wouldn’t harm current recipients, but it could compel folks nearing 62 to claim Social Security as soon as possible and a benefits cut would almost certainly damage younger demographics.
Other exceptions include immediate need, health factors and married couples where both spouses can claim Social Security. All of those scenarios are ripe for advisor involvement to help clients navigate some complex issues.
“When both parties of a marriage are entitled to receive Social Security, the partner receiving the lesser amount faces a choice. Such retirees may collect either their own benefit or up to 50% of their partner’s age 67 benefit, whichever is greater,” concludes Rekenthaler. “Although too complex to be discussed in this space, the upshot is that in such cases, the lower earner may sometimes be well served by filing early for Social Security benefits.”