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Retirement Planning > Social Security > Claiming Strategies

Social Security Claiming Baffles Even Sophisticated Clients. Here's What Advisors Can Do.

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What You Need to Know

  • Even sophisticated clients experience significant confusion and consternation regarding Social Security.
  • While most could benefit from delaying their benefits, many make suboptimal choices and claim early.
  • The near-record Social Security COLA set for 2023 offers a teachable moment for advisors and their clients.

Even sophisticated investors tend to be under-informed and overwhelmed by the complexity of Social Security claiming and how to choose (and time) the best strategy for their situation.

According to Mike Lynch, managing director of applied insights at Hartford Funds, the outlook for Social Security is more complicated than ever, with big questions being asked about the financial future of the program at the same time that retirees are anticipating a near-record 8.7% cost-of-living adjustment set for 2023.

With these factors in mind, Lynch says, financial advisors can expect to face a lot of tough questions about Social Security in the coming year. Advisory professionals can also expect to either gain or lose credibility in the eyes of their older clients, Lynch warns, according to their ability to deliver useful Social Security insights.

Near-Record COLA Spotlights Social Security

“As we head into 2023, there is no question that the large Social Security COLA has put a spotlight on the federal program and its importance to investors of all stripes,” Lynch says. “Anecdotally, I can tell you that we far surpassed our internal webinar attendance record earlier this year when we put on an event about the Social Security COLA and about claiming strategies.”

Lynch says Hartford Funds’ advisor partners see improving their awareness of Social Security claiming strategies as a top strategic priority for 2023. Fortunately, he says, advisors have no shortage of resources to which to turn for insight, and if they put in the effort to keep on top of the latest developments, there’s a lot of opportunity to deepen client relationships.

What Clients Need to Know

One of the most useful pieces of information to convey to clients, Lynch says, is the virtue of delaying benefits. Broadly speaking, the vast majority of today’s workers who are nearing retirement could benefit from waiting beyond their full retirement age to collect Social Security.

One recent analysis from the National Bureau of Economic Research, in fact, shows more than nine in 10 should wait till age 70 for optimal claiming. According to the research, delaying could produce a 10.4% increase in the typical worker’s lifetime spending capacity.

In Lynch’s experience, advisors and their clients often overlook just how significant the benefit of delaying benefits can be. According to Hartford Funds data, a typical investor expecting a $1,000 monthly benefit at age 66 would receive only $750 if they claimed at age 62, while they would receive $1,320 if they waited until age 70.

Another key insight advisors can bring to their clients is a demonstration of the way working while drawing Social Security can impact the benefit amount, Lynch says. Assuming a person has reached the minimum claiming age but has not reached full retirement age, the basic mechanics are that the benefit amount is reduced by $1 for every $2 in earned income above $19,560.

Once that person reaches the full retirement age, the reduction is $1 for every $3 in earned income above $51,960. Beyond the full retirement age, in turn, there is no limit on earnings, and previously withheld earnings are also returned.

Clients are also very likely to ask their advisors about Social Security taxation, Lynch says. While the picture is complicated, there are some basic rules of thumb for advisors to share. F

or example, if a married couple’s combined income is less than or equal to $32,000, their benefits will not be taxed. Those couples with combined incomes between $32,001 and $44,000 will see up to half their benefit subject to income tax, with those couples with higher incomes can see up to 85% of their benefit taxed.

Ultimately, Lynch says, some of the most powerful strategies advisors can bring to bear for their clients involve identifying ways to reduce individuals’ and couples’ combined income, for example by utilizing Roth IRAs or Roth 401(k) accounts. Depending on the client’s situation, Roth conversions may be useful, or Social Security bridging strategies may deliver greater overall income.

Easing Client Fears Is Also Key

In the end, according to Lynch, perhaps the most important piece of information to deliver to clients is that Social Security is very unlikely to entirely disappear anytime soon. Benefits may end up being reduced or reformed in the future, but a wholesale elimination of Social Security “just isn’t in the cards.”

“This is often the elephant in the room when clients come in and start asking questions about Social Security,” Lynch explains. “Of course, I don’t have a crystal ball, but we think it is just very unlikely that the system would ever disappear all together. It’s just too important to far too many stakeholders, and frankly, I can’t imagine members of Congress or a future president standing in front of the American people and telling their voters that Social Security ended on their watch.”


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