If your client is like most, they have no doubt been looking forward to retirement, and to collecting on the Social Security benefits due them. After all, they’ve put a lot of money into the Social Security kitty over the years, and its time there was a little payback.
But is it really? Is your client wise to start collecting on Social Security at the first opportunity? How early is too early? Should they wait to full retirement age? Or should they delay those benefits a few years into retirement? The correct answer depends on a lot of factors, including whether your client or a spouse are currently employed, whether they have a pressing financial hardship, what their health profile and medical history looks like, and what tax bracket they fall into.
“Most people should delay taking Social Security as long as possible, but there are all sorts of exceptions to this general policy,” said Larry Luxenberg, a financial advisor and owner of Lexington Avenue Capital Management in New York. “Spouses, widows or widowers, people with minor children, those who are struggling financially all should consider taking Social Security early. When you begin receiving benefits and when you are retire are often two different ages, so you need to weigh a lot of factors before signing up for Social Security.”
Generally speaking, your client is eligible to begin collecting Social Security at age 62 by filing for early benefits, Luxenberg said. Full retirement age is now generally considered to be age 66, though it ranges from 65 to 67 depending on when you were born. The downside to taking early benefits is the reduced monthly payment that your client would receive. The advantage they get comes in the form of immediate financial relief.
“If I’m going to be foreclosed on next month and I could get a Social Security check that would let me keep my house, it’s a no-brainer,” Luxenberg said. Another situation in which early benefits can be attractive for your client is if they still have dependent children living at home, say in junior high school or high school. The children might be eligible for dependent benefits when your client begins taking Social Security.
Another factor to discuss with your client is a current medical condition or a history of medical issues in their family, according to Dennis H. Bussian, a financial advisor with Ameriprise Platinum Financial Services in Minneapolis. In this case, your client must weigh their presumed longevity—do they expect to live a long life; a not-so-long-life; or even a short life? Your client is really playing the odds in this case, he said. For some, collecting early may be their best bet at collecting the most in benefits overall.
Even if your client’s health is an issue, if married, it might still be in their best interest to delay collecting Social Security benefits. Your client’s spouse might be collecting in the meantime, and your client’s benefits might be potentially higher. Since Social Security benefits can be passed on, that would enable the higher benefits to go to the survivor when they are perhaps more needed.
But assuming good health, experts agree that the best course of action is to advise a client to wait until full retirement age, and beyond if possible.
“If you’re still working and making a fairly significant amount of money, you’re not going to be able to collect Social Security benefits anyway, so you’d have to wait until full retirement age,” Luxenberg said. “Another factor is that by delaying, your monthly checks are significantly higher for the rest of your life.”
A key factor in advising when your client should begin collecting Social Security depends on what other assistance they are drawing on in retirement, added Brussian. That includes 401(k) plans, IRAs and other investments, government or company pension plans, etc. If any or all of those tools are paying out benefits when your client first retires, they may not need to draw on Social Security right away.
“You have to figure out your total financial picture,” said Luxenberg. “Part of the claiming strategy is to figure out what your tax bracket will be over the next five years; 10 years; 15 years. You have to figure out when you’ll be withdrawing money from your IRAs. “
Should your client decide to delay Social Security, the longest they can put that off is to age 70. But the benefit of doing so could be significant. Between age 66 and age 70, for each year your client delays taking Social Security benefits they get an 8 percent per year delayed retirement credit. By age 70, the increase is 32 percent per year.
“That’s a pretty good increase, not to mention the cost of living adjustment on top of that,” Luxenberg explains. “So your actual check at age 70 could be double what it would be at age 62. In today’s low interest rate environment, it makes sense to maybe live more on your personal savings and investments in the early years of your retirement, and postpone Social Security to a later age, to age 70.”