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February 27, 2020 at 04:22 PM
The way your clients experience retirement is changing. Today, baby boomers are working longer than any generation in the past 50 years, with 25% of those aged 65 to 72 now participating in the workforce. With these changes come new questions about when it makes sense to start taking Social Security. Not surprisingly, the answer depends on the individual.
Betting on Longevity
Earners can start taking Social Security as early as age 62, but for many advisory clients, waiting until their full retirement age (FRA) or later makes more sense. Why? Because the benefits of waiting are often substantial. For every year a client waits to claim beyond their FRA, they receive a delayed retirement credit of as much as 8%. A guaranteed income stream that grows 8% per year is virtually impossible to find elsewhere in today’s low interest rate environment. That difference can add up to tens of thousands of dollars for clients who live long enough.
So how do you determine if a client should wait to claim? A good place to start is with a client’s break-even age — the age beyond which they come out ahead if they wait to start Social Security. If a client expects to live beyond their break-even age, then they should wait to claim.
Of course, break-even age is only one factor in a much broader decision. Your recommendation for when to claim should also consider the big picture of your client’s situation, including their marital status and the life expectancy of their spouse, as well as their employment history, future earning potential, cash flow needs and tax circumstances. For married couples, the higher earner often benefits from waiting longer to claim. If the higher earner dies first, the surviving spouse will be helped by the stepped-up survivor benefit.
Weighing the Tradeoffs
A client’s guess as to his or her life expectancy will have a significant impact on their decision of when to claim Social Security.
When Starting Early Makes Sense
Clients who claim before their FRA will receive more payments, but those payments can be as much as 30% smaller. Even so, sometimes there are good reasons to start early. For example, if a client has significant health concerns, or has relatives who have died relatively young (e.g., before age 70), their life expectancy may be shorter and claiming before their FRA may make sense.
In addition, clients who lack savings to fully fund their lifestyle in retirement might also benefit from claiming early, especially if that allows them to put off drawing on tax-advantaged accounts.
Finally, some clients may want to claim early in order to fund a more active lifestyle in early retirement, when they’re physically able to travel and pursue their interests. Those clients should plan on reducing their spending as they become less active in mid- to late-retirement.
A Relationship-building Opportunity
According to a recent poll, 59% of American workers say retirement planning makes them feel stressed. This stress stems from the complexity of choices, as well as the gravity associated with the possibility of making the wrong choice. Helping clients navigate decisions around Social Security provides one of the best opportunities to alleviate fears and strengthen your client relationships. That’s an opportunity not to be missed.
