There are many reasons clients might delay claiming Social Security benefits. At our firm, once we’ve cleared up common misconceptions with our clients, they’re often more open minded about hearing possible reasons for a delayed strategy. Many had never thought of these reasons before. Have you?
If not, that’s okay because today, I’m going to share some of the reasons your clients may want to consider a delayed strategy.
No Forfeiture of Benefits and COLAs
First and foremost, by waiting until full retirement age to claim, clients could avoid forfeiting a significant percentage of full retirement age benefits and the cost-of-living adjustments that they would receive on those lost benefits.
Unless clients have been diagnosed with a life-threatening medical condition that could potentially shorten their life expectancy, or they have a family history of short life expectancy due to hereditary health complications, waiting at least until full retirement age often makes sense.
Avoiding the Earnings Limit
Many folks are still working in their early to mid-60s and claiming Social Security prior to full retirement age will subject Social Security benefits to the earnings limit.
If your client is making a good income, there’s a chance they may receive no benefit check at all if they claim early — simply because they exceeded the earnings limit.
In 2019, if a person’s income is greater than $17,640, they will end up giving back one dollar for every two dollars they earn over that amount. For many full-time employed folks, they earn enough income that they’ll end up giving back most or all of their Social Security check. And potentially, receiving nothing.
However, the benefits are not gone for good. They do get added back into benefits later.
Nevertheless, in that scenario, why would someone want to claim early?
Super-Size Survivor Benefits
Another potential reason for claiming benefits under a delayed strategy is to increase the survivor benefit.
Oftentimes, one spouse is a lower wage earner and the other spouse is a higher wage earner. When one of the spouses passes away, the surviving spouse will generally receive the higher of the two Social Security benefits and lose the lower one.
In meeting with clients, it typically makes sense for the lower wage-earning spouse to claim benefits early and get cashflow coming into the household retirement income plan. While it often makes sense for the higher wage earner to delay benefits in order to earn delayed retirement credits and increase the future survivor benefit.
Since many women outlive their husbands by more than a decade, most survivor benefits are received by widows. Therefore, it can be somewhat of a women’s planning issue when making Social Security claiming decisions.
But it’s quite common to see a husband with a higher Social Security benefit. There may be many reasons for this and while it is not always the case, it is most common. Meanwhile the wife may have been the lower wage earner for a number of reasons, and she’s often the younger spouse.
It can be a selfless decision for an older male spouse, as a higher wage earner, to delay claiming Social Security benefits. There’s a natural desire for him want to claim early and start receiving benefits on his record. After all, he wants to get if before it’s gone, or before he’s gone.
However, delaying so that the survivor benefit is optimized will likely have a profound impact on his spouse after he’s gone.
Acting on impulse and claiming early under these conditions could be viewed as a selfish decision. It would permanently reduce Social Security benefits and he’d lose out on any delayed retirement credits and consequently, reduce the survivor benefit permanently.
Helping spouses to coordinate benefits is one of the roles we fill when it comes to retirement income planning and Social Security.
We’re Living Longer
Another reason clients may choose to delay claiming Social Security is that we’re living longer and our retirement income must last as long as we do. Life expectancies have increased substantially.
"Most people underestimate how long they are likely to live, according to the Stanford Center on Longevity. A 65-year-old man today can expect to live to 84, according to the Social Security Administration. A 65-year-old woman can expect to live to 86.5. Couples who are 65 today stand a 50% chance of having one spouse live to 92, according to the Society of Actuaries. Life expectancies are even longer for those now in their mid-50s. One in two women and one in three men will live past 90, the actuaries say." (Source)
Developing a plan in which retirement resources are exhausted at a person’s life expectancy, will fail 50% of the time. This is because by definition, life expectancy is the midpoint at which half a peer group is alive and half a peer group has passed.
If a retirement income plan isn’t sufficient to get beyond life expectancy, the odds of running out of money may be the same.
Delaying Social Security benefits can help your clients increase the odds of not running out and planning for the wellbeing of their surviving spouse.
It’s Tax-Advantaged Income
By coordinating your clients’ retirement resources, including Social Security strategies, it may be possible to reduce their taxable income during waning years of retirement.
Sometimes it makes sense to delay Social Security benefits and use pre-tax (IRA or 401(k)) retirement assets to fill the gap. For example, if someone wanted to retire at age 65 it might make sense for them to use some of their pre-tax money to maintain their lifestyle from age 65 to age 70 while they allow their Social Security benefits to earn delayed retirement credits.
By the time they turn on Social Security, which is tax advantaged, government backed and inflation adjusted, they may have spent down a good portion of their pre-tax dollars. In that case, their required minimum distributions after age 72 are likely to be lower than they would have been otherwise. Since distributions from pre-tax accounts have a profound impact on taxation of Social Security benefits, this may be one way to mitigate those taxes.
How you can help
The decision about when and how to claim Social Security benefits in order to maximize household retirement resources is not one your clients will want to take lightly. If you’re a financial professional who specializes in Social Security and retirement income strategies, this can be a valuable service to your clients.
However, many financial professionals have little to no experience when it comes to Social Security. They might have become experts in wealth management, investment management, and other factors impacting the accumulation phase of retirement saving. But retirement income planning and the art of distributing assets to last a lifetime requires a completely different set of skills and knowledge.
And here’s something that might surprise you — 76% of near retirees have said they’d be somewhat or extremely likely to switch financial professionals to potentially increase Social Security benefits.
If you’d like to develop an expertise in Social Security planning strategies, we have a couple of resources for you.
If you’d like to obtain a designation related to Social Security:
National Social Security Association https://www.nationalsocialsecurityassociation.com/
National Association of Registered Social Security Analysts https://www.narssa.org/.
However, you should consider the options that are suitable for you and your situation just as your clients should choose Social Security payout options that best suit their specific situation.
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