If I asked someone whether they would rather have $100 guaranteed today or $120 non-guaranteed tomorrow, what would their response be? Most likely the former, because guaranteed money is better than non-guaranteed. This is the basic principle behind my stance on taking Social Security as soon as you retire.
Especially now, the fate of Social Security is in jeopardy. President Donald Trump recently issued an executive order to defer payroll taxes for the rest of this year and, possibly, indefinitely. This adds yet another hurdle to the already challenging task of timing clients’ Social Security benefits.
It’s important to point out that taking Social Security as early as possible is not the best approach in all situations. Social Security-claiming age starts at age 62; however, if your client is between ages 62 and 67 and they are still working, taking the benefit could be harmful for two reasons.
First, they would be penalized, and benefits could be retracted depending on earned income. Second, they could be missing out on the growth of their Social Security as benefits grow at 8% each year that they are deferred.
Conversely, if your clients are retired or are planning to retire soon, it could make sense to turn the Social Security spigot on early for the following reasons:
1. Uncertainty Around Mortality
We don’t have a crystal ball. No advisor, regardless of experience, knows what a client’s life span will be. One of the first things I discuss with my clients is their general health situation and history. While this can help provide a better picture of someone’s longevity, it offers no certainty.
If your client decides to forgo taking Social Security early in retirement (say age 62) and passes away at age 67, five years of potential benefits have been missed. Unfortunately, Social Security does not pay out deferred benefits to beneficiaries, only a death benefit of $255.
2. Social Security Trust Fund Insolvency
Social Security is financed primarily through payroll taxes, with a small portion funded by interest earned in the Old-Age and Survivors Insurance (OASI) Trust Fund. Furthermore, the trust fund is projected to be exhausted by 2035.