More On Tax Planningfrom The Advisor's Professional Library
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- Annuities: Estate Tax The value of certain types of annuities may be included in an estate’s value. Understanding the intricacies of these inclusions is a critically important aspect of estate planning.
What could be better than “save-the-date?” A lilac-scented envelope with frilly streamers usually heralds the announcement of upcoming nuptials with an attendant celebration to boot. Choose from the chicken or fish option and you’re on your way.
If only it worked the same way with Social Security. Unfortunately, “save-the-date” means something far different in this context, and it’s not an occasion to celebrate. Here’s how it works:
Litigation-averse Social Security agents (and who can blame them?) are instructed to open a file on a future recipient upon initial contact, even if it’s simply to ask a question about payments they have no intention of immediately taking. The recipient might be at age 62 and not planning to begin receiving benefits until age 70; no matter, the file is created.
It might seem like a trivial matter and the file sits inert until the recipient is ready to claim, but it’s not the case. Social Security agents are instructed to help get recipients as much as they can. That’s a good thing. The problem is that they are also instructed to get recipients that money as soon as they can. That may not be so good.
That’s because Social Security agents must get you the most they can at that defined date; they can’t (and don’t) look at the big picture.
(See my previous blog on the role of Social Security Administration agents, Don’t Take Retirement Advice From the Social Security Administration.)
Couple this with the fact that too many people erroneously believe that agents can give claiming advice, and save-the-date creates a bias to begin taking Social Security benefits early, even if it’s not in the recipient’s best interest.
A person might begin to ask questions in August in anticipation on reaching their full retirement age in October. If they listen to the agent and begin taking those benefits just shy of 66, it could result in serious consequences. For instance, if they’re planning on a strategy involving a spousal benefit, they would no longer have that option. A host of other scenarios could also occur that would restrict the benefit amount.
If you think it’s farfetched, think again. We’ve noticed more and more of our clients mentioning the pressure they’re receiving from Social Security agents to begin taking early.
My point is that advisors have a fiduciary responsibility to their clients, and this includes help with their Social Security claiming options. It’s a guaranteed retirement income stream that affects so many other areas of the portfolio, most notably in developing a tax-efficient withdrawal strategy.
It is therefore critical to understand what save-the-date is, and how its effects are mitigated for the client’s benefit.