For most clients, delaying collection is by far the best way to maximize lifetime Social Security income. According to a report by Boston College’s Center for Retirement Research, however, roughly 42 percent of men and 48 percent of women still claim at 62, and the average collection age is 64. Nationwide Retirement Institute research shows future retirees are intending to collect later, but when push comes to shove, many people want their benefits as soon as possible.
Why are so many Americans taking a conscious pay cut?
“It’s behavioral finance,” says Hans Scheil, CEO of Cardinal Retirement Planning. “They want the security of knowing a government check is coming instead of just living on their assets.”
Others are worried the government will cut benefits by the time they start collecting; some face a short-term cash crunch following a layoff or cross-country move.
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Many of these reasons are more emotional than rational, but there are a few cases in which collecting early makes sense. Here are a few considerations to keep in mind when your clients are on the fence.
Getting the facts straight
Most seniors understand that the earlier they collect, the lower their monthly checks will be.
“What they don’t understand is the magnitude of the situation,” says Gail Buckner, financial planning spokesperson for Franklin Templeton. For anyone with a full retirement age of 66, collecting at 62 ½ nets a 25 percent lifetime benefits reduction, while delaying until 70 offers a 32 percent credit.
For younger retirees, penalties are more severe and credits less beneficial. Clients with an FRA of 67 – those born 1960 and after – will be penalized by 30 percent for collecting at 62, and they’ll only get a 24 percent credit for collecting at 70. They won’t be able to collect until 2022, but learning these numbers in advance may influence their work and investment plans in the meantime.
Low life expectancy
“If, for some reason, someone believes they won’t live until life expectancy, it absolutely makes sense to draw early,” says James Sullivan, vice president of Essex Financial.
In cases of terminal illness and family histories of early death, it may make sense for a client to collect while they can.
Still, even health concerns may not justify early collection – particularly for married clients.
“You’ve got to consider long-term care needs and survivor planning,” says Scheil. “The average cost for assisted living is around $4,500 per month in our area, and people who collect early don’t save their money for this kind of scenario.”
If a client draws early, lives longer than expected and eventually needs long term care, they’ll be in quite a bind.
Another common concern involves high-earning breadwinners and their spouses. Even if the high earner is likely to die young, their spouse may live to a ripe old age. Widows and widowers are entitled to 100 percent of their deceased spouses’ benefits, but if that spouse has already collected early, the survivor is stuck with the penalty.
Short-term income needs
Another common reason for collecting early is that some people simple need the money. They may have been laid off, retired too early or didn’t save enough, says Scheil. In fact, 68 percent of recent retirees who filed early did so to pay living expenses, and 43 percent needed to supplement their income. Similarly, 21 percent filed early to pay health care costs their other assets couldn’t cover.
“For some people, working is actually making their health worse,” adds Sullivan.