When the Bipartisan Budget Act of 2015 was first signed into law, you might remember a mad scramble to determine how the legislation would affect the guidance you provided to your clients. To make it worse, the rule changes affected individuals differently, depending on how old they were at certain points in time. But now that some of those rules have been eliminated by since-passed deadlines, do you have a clear picture of the best way to advise clients? Have the new rules changed the recommendations you make about when to claim social security?
What Have We Learned?
Statistically, it’s known that individuals tend to claim social security early. In fact, age 62 has always been the most popular claiming age. As a financial professional, you have contributed to a gradual rise in the average claiming age by educating your clients on strategies to maximize benefits. The old rules made it easy for you to show clients that strategies like “file and suspend” gave them more cumulative benefits from the system if they were to live to normal life expectancy. Further, demonstrating to clients that they only needed to make it to their late 70s for the delayed benefits strategy to make sense was a compelling argument.
But after several months of modeling client scenarios under the new rules, I would suggest that a common theme has emerged: The old assumption that “waiting to claim is best” may need further discussion. Let’s look at an example to illustrate this point:
James and Tina are both turning 66 on September 1, 2016. They have full retirement age benefits of $2,600 and $500, respectively. Inflation and life expectancy assumptions are 2 percent and 88 years, respectively.
The claiming strategy that will give them the most cumulative benefits out of the system is a delayed benefits strategy.
- Tina claims her benefits at age 66 ($500).
- James files a restricted application for spousal benefits only at age 66 ($250).
- James switches to his benefits at age 70 ($3,715).
- Tina switches to spousal benefits at age 70 ($1,407).
Over the next four years, they will receive a combined $750 per month. Once they both turn age 70, their benefits will increase significantly to $5,122 per month.
Alternatively, what if James had filed at 66 and Tina immediately claimed spousal benefits? Under this scenario they would have received $3,900 per month over the next four years. What’s most important in this comparison is the crossover point where the delayed strategy catches up. If you were to spreadsheet the numbers, you would see the crossover point is age 83 and 5 months for both spouses.
Change the Conversation
In my view, a crossover age of 83 and 5 months changes the conversation with the client. The picture is a lot less clear than it was prior to the rule changes. Specifically, risk, longevity, and quality of life need to be discussed. I suggest that you lay out both options and discuss the pros and cons of each.
Under a delayed benefits strategy, it’s clear that the major benefit is that the clients will receive more from the social security system if they live to normal life expectancy. There is a real risk, however, that one or both spouses may not live that long. If clients have either poor longevity or family history, it may be easier to make this decision.
Under a full retirement age strategy, using our example above, the major benefit is that the clients will have an additional $37,800 per year between ages 66 and 70. Some clients believe that they will slow down as they age and that having a larger income in their 60s could provide cash flow to accomplish goals while they are more physically capable. On the other hand, you may have clients who do not feel strongly about having extra discretionary income in their golden years, having already spent their younger years traveling and experiencing other life events.
One final consideration is that from a pure investment standpoint, if the clients will be investing the social security benefits for growth, a strong rate of return on the portfolio will push the crossover age out farther.
The Opportunity for Advisors
It must be said that social security rules and claiming strategies are not easy to understand. Many of you may struggle with them, so imagine how difficult it can be for a 66-year-old with no financial education or training. The above-referenced comparison is something clients typically need to see in order to understand, and social security software designed to model strategies side by side will help you with this conversation.
The expertise to coach clients through their claiming decisions is also a great prospecting tool. Your 60-year-old clients have friends who are in their 60s who might be equally confused about when to claim social security. Consider inviting your clients to a social security seminar and give them the opportunity to bring a friend who would like to learn more. This is a great way to both strengthen your relationship with existing clients and prospect for new ones.
Beyond the Numbers
It's important to note that a pure numbers analysis is not the be-all and end-all when making a claiming decision. Many other factors need to be considered even before looking at the numbers. If your clients need money to meet basic expenses, it really doesn’t matter which strategy gives them the most out of the system. If delaying appears to be the best strategy, you must consider what other sources to tap for income needs. And, of course, you need to evaluate the assumptions you’re making about longevity, inflation, taxes, and future income needs.
Social security planning is a truly robust financial planning conversation, and one you will be having more often as baby boomers continue into retirement. Ultimately, it is the client’s decision, but you can be of great service by presenting the options in an accessible way.
Have the social security rule changes affected your conversations about claiming strategies? Do you use social security software to illustrate model strategies? Please share your thoughts with us below.