This week we dig into Social Security. Optimizing Social Security is one of the biggest value-adds a good advisor can provide to the retirement planning process. I talk about why you shouldn't claim Social Security benefits just because you can, how important Social Security is for so many Americans and why the Social Security program isn't going anywhere anytime soon.
Listen to Episode 11 Here
Don't Claim Benefits Just Because You Can
Social Security recipients often aren't aware that their benefits will be reduced by 20-30% or more for the rest of their lives if they claim benefits at age 62.
Maybe some of you will remember this quote from Dr. Ian Malcolm in Jurassic Park: He says it when they’re discussing the responsibilities and moral issues of bringing dinosaurs back from millions of years of extinction.
"Yeah, but your scientists were so preoccupied with whether or not they could, they didn't stop to think if they should."
This quote actually pops into my head in many situations….
I feel like it applies to Social Security for many; they get to age 62 and they are so preoccupied that they can now receive benefits that they don’t always take the time to look at the big picture and see if they should wait.
The Importance of Social Security
According to an article from Investment News titled: Retirees lose $3.4 trillion by claiming Social Security too early...
"Despite all the talk about the value of maximizing Social Security benefits, it seems few retirees are listening. The fact that only 4% of retirees wait until age 70 to claim their maximum retirement benefits is not news. What is noteworthy, however, is how much those early claiming decisions are costing retirees in terms of potential retirement income and overall wealth."
If you wait until age 70, your benefits are 132% higher than if you started to take your benefits at age 62, so more than double what you can get in the beginning. The breakeven point on payback is between ages 77 and 83 for those that wait beyond the minimum file date.
Optimizing Social Security is one of the biggest value-adds a good advisor can provide to the retirement planning process. Each case is unique depending on goals, age, whether you are married or single, expenses, etc., but being aware of the options you have is paramount.
"Social Security pays over $1 trillion in benefits to more than 65 million people each year, or about nine out of every 10 retirees. It accounts for about one-third of all retirement income each year. About 50% of current retirees report that more than half of their current annual income [comes] from Social Security while a third report [that] more than 90% of their income comes from these benefits."
It’s hard to underestimate the importance of this program after seeing numbers like that!
Benefits of Optimizing Social Security
Back to the article: "A new study, "The Retirement Solution Hiding in Plain Sight: How Much Retirees Would Gain by Improving Social Security Decisions," quantifies the lifelong impact of workers claiming benefits before their full retirement age."
"U.S. retirees would be able to generate an additional $3.4 trillion in income during their retirement — an average of about $111,000 per household — if they optimized their decision about when to claim Social Security, the study calculated. Nearly all of this income is lost because one or more retirees in a household claimed Social Security too early, which means their Social Security benefit is lower than it would be if they had waited."
I understand the mindset. You paid into Social Security your whole life and now you want to get what’s yours! But being aware of all your options and knowing the best way to get the most from Uncle Sam is where we like to focus. Those reaching age 65 today are more and more likely to live to be 90+, and we are expected to have some tremendous breakthroughs in healthcare by 2030.
Suboptimal claims of Social Security "add up to a substantial amount of money and could significantly improve retirement outcomes for a majority of Americans."
"For some people, the best way to delay claiming Social Security is to work a bit longer." Retirees with a bit more of a nest egg "can afford to draw down their savings while waiting until age 70 to claim maximum Social Security benefits."
Social Security Isn't Going Anywhere Yet
This may be unpopular with most advisors if they are paid based on assets under management (AUM) because it may reduce their fees if they recommend clients live off their nest eggs for a few years in their 60s while they postpone their Social Security benefits to allow for the 8% increase each year.
A fiduciary advisor (like my firm) will put client interests first, and since you aren’t going to find too many (if any) guaranteed 8% returns anywhere in the world right now, and certainly none backed by the United States, this is usually a wise move if available.
Social Security is basically the best annuity ever.
- There are no high fees as there can be with most annuities
- It’s not going out of business like an insurance company can
- And, as previously mentioned, you get the 8% return guaranteed if you wait to draw, and there can be a cost of living increase each year if so designated.
So it’s a very valuable program.
Now, I know there are concerns about Social Security running out of money, and it gets hyped in the news quite a bit, but let’s be honest; we are going to keep printing the money to pay for it. Like the dinosaurs, fiscal conservation has pretty much become extinct from both parties.
If anything, people my age or younger may get benefits postponed, but people close to retirement now are probably fairly safe, so don’t be too concerned about not receiving what is owed to you.
Deciding when to claim Social Security benefits can also have a large impact on end-of-life wealth and legacy planning.
"Current retirees will collectively lose an estimated $2.1 trillion in wealth because they made the suboptimal decision about when to claim Social Security, or an average of about $68,000 per household."
Those are some big numbers and a lot of potential benefit being left on the table, so do some preparation and planning before you pull the trigger on your benefit.