Helping Clients Crack the Code on Social Security - J.P. Morgan Asset Management
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Helping Clients Crack the Code on Social Security

Contributor 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.

Maximizing Social Security benefits

Source: Social Security Administration, Current Population Survey, J.P. Morgan Asset Management.
*Couple assumes at least one lives to the specified age or beyond. Breakeven assumes the same individual, born in 1957, earns the median individual income, retires at the end of age 61 and claims at 62 & 1 month, 66 & 6 months and 70, respectively. Benefits are assumed to increase each year based on the Social Security Administration 2018 Trustee’s Report “intermediate” estimates (annual benefit increase of 2.7% in 2020 and 2.6% thereafter). Monthly amounts without the cost of living adjustments (not shown on the chart) are: $1,080 at age 62; $1,491 at FRA; and $1,908 at age 70. Exact breakeven ages are 76 & 4 months and 80 & 5 months.

3) Consider all unique personal circumstances

Advisors should encourage clients to consider all personal circumstances that can dictate the most appropriate social security decision. For example, in situations of poor health or chronic conditions that are very likely to shorten life expectancy, it may be a higher priority to receive benefits sooner than delay and not achieve the relevant break even age.

Likewise, depending on their financial situation, some retirees may not be eager to tap into their savings to pay for living expenses and may elect to take Social Security early to protect their assets. If delaying claiming and using their portfolio would cause them to change their investment strategy in an overly negative way (i.e., move more heavily into cash or selling out of equities all together), this may be prudent decision as long as they understand the tradeoffs they are making. If, however, it is because they think they can ‘out-invest’ Social Security, advisors should coach them that this is virtually impossible to do over normal life expectancies and given the market outlook for at least the next 10-15 years.

Advisors should also warn their clients against taking social security benefits early out of fear that the program will run out of money. While it’s true that the trust fund is projected to run out by 2035, it’s highly likely that congress will act to shore up the system before this time and any major changes to claiming ages or benefit amounts are most likely to affect much younger Americans who will have more time to adjust for the changes.

Social Security is an important component of retirement income for everyone eligible to claim a benefit, regardless of the wealth level of the individual. Financial Advisors play a critical role in assessing the unique personal circumstances of their client to successfully guide them to make the right, informed decision about which Social Security claiming age works best for their unique retirement income plan.

1 Social Security and Medicare Lifetime Benefits and Taxes, Urban Institute, 2017

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