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Fund Operations

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Advising Clients

Help Clients Make Better Social Security Claiming Decisions

Jan Blakeley Holman, CFP, CIMA, ChFC, CDFA, CFS, GFS
Director of Advisor Education
12 Sep 2023
4 min read

Social Security is another area where you demonstrate your value to clients.

As your clients’ chief financial strategist, you know their financial situation intimately, including the income and the expenses they anticipate once they retire. That knowledge puts you in the best position to help them make the decision on when they should claim their Social Security retirement benefit. Unfortunately, unlike most other financial recommendations you make, clients often disregard your advice regarding Social Security and instead rely upon rumors and misinformation. That approach may cost them dearly.

A recent Schroders survey of non-retired individuals reported that 90% plan to claim their Social Security retirement benefit before they reach age 70 and 40% of those individuals plan to claim their benefit before their Full Retirement Age (FRA), the age recipients are entitled to full retirement benefits. Even more concerning is that 95% of those between 60 and 65 who plan to take Social Security early are making the decision knowing they are giving up the higher future payments they would receive if they had waited.

Figure 1 The reasons why respondents plan to claim their benefits before age 70.

Source: Schroders

Looking closer at the survey, it’s apparent that many are saying, “the Social Security system is unstable”, a concern shared by many Americans. Who can blame them? The news about Social Security never seems positive. A recent headline in “ThinkAdvisor”, titled “Retirees Face $17,400 Cut to Social Security Benefits in 2033”, plays into the belief that the system is teetering on the brink. Digging further into the article, one finds that the $17,400 cut to benefits is contingent upon no changes being made to the program over the next 10 years. Many advisors will see the article’s title and assume the die has been cast.

But Their lack of confidence in the Social Security system isn’t the only thing that causes individuals to claim benefits early. As Schroders indicated, some individuals need to receive their Social Security retirement early to meet immediate financial needs, some are unable to work, and some believe they should claim as early as possible because they don’t expect to have a long life. To make an informed decision about Social Security your client needs to discuss two things with you. First, the monthly benefit they are entitled to receive each year between ages 62 and 70. Your client can get this information from their account on ssa.gov. Next, using the information they’ve received from Social Security, you should create a breakeven analysis to show them the amount of time it will take to recover the benefit if they wait and refrain from taking their benefit earlier.

Figure 2 illustrates how much a client born in 1961, who earns $100,000 annually would receive if they claimed their Social Security retirement benefit at age 62 or waited each additional year until they reached 70 in 2031.

Figure 2 The impact of claiming Social Security at different ages

Based on a person born in 1961 who will receive $2,593 in Social Security at Full Retirement Age (FRA)

Age First Claiming Monthly Benefit Annual Income
62 $1,685 $20,220
63 $1,826 $21,912
64 $1,980 $23,760
65 $2,180 $26,160
66 $2,384 $28,608
67* $2,593 $31,116
68 $2,841 $34,092
69 $3,094 $37,128
70 $3,353 $40,236

Source: Social Security
* Full Retirement Age for individuals born after 1960 as defined by Social Security
This illustration is hypothetical. The Social Security Administration calculates the monthly retirement benefit based on the amount of earnings the individual would receive in 2023. Social Security does not use earnings in the year an individual begins receiving benefits.

As Figure 3 demonstrates, the cost of waiting is quantifiable. Individuals who wait to collect their Social Security retirement benefit at a later age are trading immediate income for a higher benefit in the future. They make the decision to wait because they believe they will live a long life and understand that there’s a significant financial reward for waiting. Once they reach that age, their Social Security income will far outpace the amount they would have received if they had taken the benefit earlier.

Figure 3: Breakeven Ages and Amounts

Breakeven Age Breakeven Amount
Claim at Age 62 vs. Age 67 (FRA) 76 years 10 months $375,621
Claim at Age 62 vs. Age 70 78 years 8 months $529,995
Claim at Age 67 vs. Age 70 80 years 7 months $429,584

Average annual COLA 2%

What About Social Security’s Stability?

Since the last significant changes in the Social Security program were made in 1983, it makes sense that many Americans expect nothing will change between now and 2033 when benefits would have to be cut. That’s not the case. According to the Social Security Administration, on average, over 67 million Americans receive a retirement benefit check every month, additionally they report that 97% of older adults (aged 60 to 89) either receive Social Security or will receive it. Although Congressional representatives on both sides of the aisle appear reluctant to “fix Social Security”, the sheer number of Americans who depend on their monthly Social Security checks is so large it will be impossible for Congress to avoid addressing the program’s problems forever. Changes will be made, and the Social Security system will be revamped in a manner that reflects the realities of today’s labor force, not the labor force of 1983 or 1935 when the program was created. Your expertise is essential to guide clients through this complex landscape, ensuring their decisions reflect both the costs and benefits to this important decision.

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