With lifespans increasing, pensions disappearing and returns on IRAs and 401(k) plans uncertain, the monthly income provided by Social Security is becoming an even more important resource for those about to retire. While it’s a complex issue for advisors and their clients, Bill Reichenstein, a principal at Retiree, Inc, as well as a professor of finance and the Pat and Thomas R Powers Chair in Investment Management at Baylor University in Waco, Texas, believes it's one that deserves careful consideration, particularly in regard to the age at which clients begin to receive benefits.
While longevity is the ultimate wild card of retirement planning, it isn’t the most crucial issue in making the decision about when to take Social Security. “It isn’t just how long you think you’ll live, and whether you’ll live to that precise age, but at what age do you start to take benefits to maximize them?” he says.
It’s an especially complex decision for couples, because there are two incomes to consider, two lifespans to predict and the issue of survival benefits for the remaining spouse. Wealth managers and their clients need to balance out all the various issues and figure out how to capitalize on each situation to gain the most benefit for each spouse.
These issues are important for high net worth clients for several reasons because when the Social Security payout is maximized, wealth managers can:
· Use other income streams and assets for other purposes, such as charitable giving, funding grandchildren’s college educations through Section 529 plans and building a larger overall estate to pass on to future generations.
· Take advantage of all of the money available from Social Security and not leave any funds on the table. Your clients earned it and they deserve every penny they can get.
· Spend less time worrying about maximizing yield – in a low interest rate environment, squeezing out every basis point of yield is critical, but you don’t want to take too much risk. By maximizing the Social Security payout, clients will have more income and less need to go after every bit of yield available.
In many cases, by postponing taking Social Security benefits until age 70 from age 62, the monthly benefit will be substantially more, Reichenstein says. For baby boomers, many of whom are expected to live into their 90s, securing a significantly higher monthly payout for the rest of the client’s life, no matter how long that is, outweighs many other considerations.
“By waiting, you get so much more in Social Security benefits over your lifetime that there is a much lower chance that you’ll run out of money,” he says. “If you’re worried about longevity risk, if you don’t want to be a burden to your kids or don’t have anyone to take care of you, maximizing benefits makes the most sense because you cannot outlive your benefit. We encourage financial advisors to make sure to get this point across to their clients so they can make the most informed decision possible.”
There are no hard and fast rules on exactly how to decide when clients should take Social Security benefits, because each case is an individual one. However, most people who take benefits at age 62 do themselves a disservice because the payout is so much lower over their lifetime, unless they are in dire need of the funds because of a forced retirement, layoff or other unanticipated event, he continues.
The Social Security website offers a Retirement Estimator Calculator (click here) that can help you and your clients figure out what their benefits will be based on different retirement age scenarios and what their full retirement age is, because that depends on their date of birth. The site also provides information about the pros and cons of receiving benefits at different ages (click here) and another calculator that helps you estimate a client’s life expectancy (click here).
One example provided by the Social Security Administration about the differences in benefits available when claiming at various ages, assuming a full retirement benefit of $1,000 at age 66, shows a 43.2 per cent increase if the benefit is taken at age 70 compared to 62.
The Marriage Issue
The potential benefit of waiting as long as possible to claim benefits is even greater for a married couple, Reichenstein asserts. The higher earner in a married couple will do the lower earning spouse a big favor by waiting as long as possible to claim benefits, he continues. That’s especially true if the lower-earning spouse is likely to live longer than the higher-earning spouse, either due to health issues or an age or a sex difference, because women typically live longer than men.
Because the issues for spouses are complex, you need to do some due diligence to figure out when it makes sense for each spouse to claim their benefit to get the maximum reward. Reichenstein cites a case that he’s aware of where it made the most sense for the wife to claim spousal benefits at age 66, her full retirement age. That amount is half of the spouse’s benefits; then, when she turns 70, she can switch and claim benefits in her own name. The Social Security website provides a calculator and more information on spousal benefits and whether it makes sense to claim them or not (click here).
So in some cases, waiting for the full retirement age doesn’t make sense. It may make sense to claim at the lower earning spouse’s full retirement age, or even as early as possible, he says. Each situation is unique in its own way, which is why the advisor needs to probe for information and run all the numbers to ensure that clients receive as much of their potential benefit as possible.
When the higher-earning spouse waits as long as possible to claim benefits, the surviving spouse, assuming the lower-earning spouse with the lower benefit lives longer, will receive a bigger benefit when the higher-earning spouse dies, he notes. This issue is too often ignored, especially since women tend to earn less over a lifetime and live longer.
“It’s a very important issue for the surviving spouse, who stands to receive a much larger benefit if the higher-earning spouse waits to receive the benefit at least until full retirement age or longer,” Reichenstein says. “I wish I could tell you that it didn’t happen, but it does, and these individuals are really short-changing their spouses.”
More information about surviving spouse benefits and how to calculate them is available at the Social Security website (click here).