Social Security benefits can be tricky for people in their 50’s approaching retirement. The conditions are changing and what may have worked for their parents may no longer be an option for Baby Boomers. As a financial planner, your clients will look to you for advice on how to maximize their Social Security benefits.
Knowing all the intricacies and complications of Social Security can help you guide your clients to getting the most from their benefits. Many clients make the mistake of thinking that Social Security is like a personal savings account. Confusion increases due to inaccurate assistance from the Social Security Administration or changing Social Security reforms.
Part of your job as a financial planner is informing your older clients looking to retire exactly what Social Security benefits are and to set realistic expectations. Without other savings and investments in place, Social Security will not be enough for them to retire. By explaining the basic concepts, you lay the foundation for how your clients should claim their Social Security benefits and give them an idea of how much they should save to prepare for retirement.
But as you know, saving is only a small piece to the puzzle when it comes to retirement and Social Security benefits. Other factors will come into play, and being fully aware of each one will help you map out the best strategy for your clients.
What is the Ideal Age to Claim Social Security Benefits?
The first question most Baby Boomers have when it comes to Social Security is when they can start collecting benefits. On paper, the best time to claim is when they reach full retirement age, which varies based on the client’s birth year. Depending on the year your client was born, their full retirement age could range between 65 and 67 years old. However, according to the SSA, individuals can start claiming anytime between ages 62 through 70 years old.
While the official age of eligibility for Social Security gives your client some wiggle room, keep in mind that they could receive penalties for claiming Social Security too early or credits if they are able to delay.
Claiming too early could permanently reduce their payments by a significant amount. Delaying up to 36 months results in a reduction of five-ninths of one percent for each month. If they claim benefits before 36 months of their full retirement age, they could be penalized five-twelfths of one percent. For example, if you started collecting Social Security four years before your full retirement age, you would see a reduction of 25 percent for each month’s payment (The prior 36 months equate to a 20 percent penalty. The remaining 12 months would result in a 5 percent penalty).
However, delaying payment could work in their favor. Clients receive an eight percent credit for each year they delay claims between their full retirement age and turning 70 years old. The credits accumulate, so waiting two years after your full retirement age to collect Social Security would make your collections a 16 percent higher amount.
When looking at the numbers, delaying Social Security seems like an obvious choice. But, it’s more complicated than that. Even if you have an ideal age in mind to start collecting benefits, it may not be realistic to wait longer. Factoring in other elements that impact Social Security will help you figure out the best time to advise your clients when to start collecting.
What Other Factors Should Your Client Consider Before Claiming Social Security?
As you start discussing Social Security benefit claims with your clients, be sure to look at the whole picture. Keep in mind:
1. What are your client’s financial needs?
Social security benefits aren’t a one size fits all solution for Baby Boomers. If your client starts expressing interest in retirement, you need to be sure that they have the adequate funds they need in order to retire in modest comfort.
Unfortunately, many Baby Boomers are behind the curve when it comes to their retirement savings, which is one of their major concerns and possibly the primary reason they are reaching out to you for help. Your job is to help them come up with a financial plan that will help them save enough to retire while still maintaining their current standard of living.
While Social Security benefits may play a role in their retirement payments, they can no longer rely on benefits from Social Security to provide the bulk of their income. That should come from their savings and investments.
If your client is right on target with savings, they can afford a little more flexibility with deciding when to retire without having much impact on their cash flow and lifestyle. However, if they are banking on Social Security to help them make ends meet during retirement, then they may need to wait a bit longer before collecting. Ideally, they should wait until after their full retirement age so they can maximize their benefits.
2. What is your client’s life-expectancy?
While it may be ideal to wait until one is 70 years old to start collecting Social Security so they can receive more money, life may have other plans. Realistically, as people age, they will have more medical needs and costs arise, which could eat up their savings and Social Security benefits. While waiting for additional credits may seem wise, it may not make much sense if your client is in ill health.
The purpose of Social Security is to span the collectors’ lifetime. Regardless of when your client starts collecting, the amount should level-out based on the current average life expectancy. Even if your client starts collecting early, that means they will receive more checks than if they had waited for credits. To maximize their Social Security benefits, you should calculate the age they would need to start collecting in order to break even or come out ahead.
If your client has an average life expectancy, then it shouldn’t matter when they start collecting. However, if they believe they may exceed their life expectancy, it would be more prudent to wait until after their full retirement age and increase their checks. For clients that are in poor health, it may be wiser to start collecting earlier so they can get what they can while they are able to.
3. Does your client have a spouse?
When calculating your client’s Social Security benefits, their marital status also plays a large role in how much they can collect. And this is where things can get a little tricky. If your client is part of a married couple, you should consider when both spouses should start collecting benefits.
There are few strategies you can consider, and recent laws that have changed the game a bit for spouses relying on each other’s Social Security benefits. For example, the file-and-save strategy was recently eliminated. This means that, unless your client turned 62 before January 1, 2016, they can no longer file a “restricted application” to claim a spousal benefit.
Clients who have similar work histories and life expectancy with their spouses should file close to age 70 if possible. However, if there is a significant difference between the two work histories and income, a few different strategies can be implemented to optimize their joint Social Security benefits. A popular strategy is 62/70 split strategy, where the lower-earning spouse files at 62 and the higher-earning spouse starts collecting benefits at 70.
As you can see, trying to optimize Social Security for a joint lifespan can become complicated quickly. With the ever-changing laws and multiple possible scenarios, working with someone who has more extensive knowledge of the intricacies of Social Security benefits may help you find the best path for your clients.
4. Does your client plan to continue working in retirement?
Just because your client decides to retire doesn’t mean that they’re finished working. In many cases, retirees decide to continue working to earn some supplemental income or just to stave off boredom. Either way, their decision to continue working could impact their Social Security benefits if they decide to file early.
For example, if your client earns above the annual limit after filing for retirement, their benefits may be reduced one dollar for every two dollars they earn above $17,040 (the annual limit in 2018 before their full retirement age. The year they reach their full retirement age, it becomes one dollar for every three dollars earned above. $45,360 (in 2018) until the month they reach full retirement age. After full retirement age, there is no earnings limit.
Their Social Security could also be taxable depending on their modified adjusted gross income (MAGI).
Why You Should NEVER Let a Client File For Social Security Benefits on Their Own
Social security benefits can do a lot to help someone in retirement supplement their income. However, it can be a complicated beast. Many clients may be confused about when they should start filing or what they can expect. While younger generations know not to count on Social Security funds for retirement, Baby Boomers are more optimistic and most have set unrealistic expectations about how much Social Security benefits will cover.
As their financial planner, your responsibility is to guide your clients through the process of claiming Social Security benefits. Left to their own devices, they may wind up shortchanging themselves which can drastically impact what they earn from Social Security. Acting as their guide, you can help them maximize their benefits while planning enough savings to retire comfortably.
Having extensive knowledge of the ins and outs of Social Security benefits will help you make the best decisions for your clients. But, as you can see, that’s a lot to learn. With constantly changing laws and strategies, it’s even more difficult to resolve the best financial plan for your clients when it comes to Social Security.
That’s why now, more than ever, using outside Social Security experts can help you make the best recommendations for your clients.