Helping Clients Crack the Code on Social SecurityContributor Katherine Roy
Deciding on when to retire is very personal and depends on a number of factors, including having a clearly defined vision for how and where time and financial resources will be spent, health and healthcare insurance options, family longevity, and penalty-free or mandated withdrawals from retirement accounts. Another key piece in this puzzle is access to Social Security benefits.
For financial advisors in particular, it’s critical they educate clients with the facts early – before their decision is formed by less informed sources. Even for affluent clients, lifetime Social Security benefits can be a significant percentage of retirement wealth if viewed as a lump sum. According to an analysis by the Urban Institute, a couple with combined annual earnings of $133,400 turning 65 in 2025 will receive $821,000 in Social Security benefits in their lifetime1.
I’ve witnessed in my discussions with both advisors and individuals that the Social Security claiming decision can be overwhelming. Present bias – the overvaluing of short term gains rather than long-term rewards – is powerful and is not helped by the fact that most Americans significantly underestimate how long they might live. The result? Confusion about when and why to claim Social Security benefits.
J.P. Morgan’s annual Guide to Retirement identified 3 key areas advisors should focus on when helping their clients navigate social security:
1) Understand Social Security Timing Trade-Offs
Surprisingly, few Americans understand the benefits and trade-offs related to claiming Social Security at various ages. The Social Security program is structured to pay higher benefits to those who delay claiming – in other words, beneficiaries have a choice of smaller checks earlier, or bigger checks later.
Financial Advisors play a pivotal role in helping clients understand that when they claim Social Security will have a permanent impact on the benefit they receive. Claiming before full retirement age can significantly reduce benefits, while delaying increases it. For example, a client that is 65 or older with a Full Retirement Age of 66 can receive 32% more in a benefit check if they delay until age 70 than if they claimed next year.
Advisors should work with their clients to run different scenarios showing how each claiming age and benefit will fit into their overall plan, and help them make a decision that best suits their personal circumstances.
2) Maximize Social Security Benefits
To combat present bias and life expectancy nay-sayers, advisors should help every client understand his or her ‘Social Security break-even age’ – how long do you need to live to make waiting to collect a bigger benefit actually give you more in total value than claiming smaller benefits earlier. An important follow on is to highlight the odds that he or she may reach that age or beyond. In the case of a married couple with a wide earnings difference, the primary earner also needs to understand the odds that one spouse may live to those ages, because his or her claiming decision will be what the survivor will receive when one spouse passes away. The chart below illustrates this for a median earner – but the results are the same for all individuals.