Americans don’t want to take Social Security benefits early, but in some cases, they have no choice.
According to Fidelity Investment’s latest Social Security IQ Survey, the majority of Americans would prefer to wait as long as possible to begin collecting Social Security benefits. Just 28 percent of “pre-retiree” individuals (age 55 to 61) surveyed said they would start collecting at age 62, the earliest age to do so.
That figure is a big departure from a similar Fidelity study in 2008, when 45 percent of Americans said they’d collect Social Security at age 62.
Waiting until age 70 to collect can be worth as much as 8 percent yearly, a stronger return than most investments. It seems pre-retirees are wising up to the fact that by waiting until at least age 67, their monthly checks from Uncle Sam are much fatter.
According to Fidelity, if you claim Social Security at age 62, rather than waiting until your full retirement age (FRA), you can expect up to a 30 percent reduction in monthly benefits. For every year you delay past your FRA up to age 70, you get the 8 percent boost.
Still, not every retiree can afford to delay Social Security, primarily due to health and lack of income, among other lifestyle financial issues. To provide some clarity, let’s take a deeper dive into the more prominent “early-bird” issues that affect these decisions.
Here are five issues advisors need to understand in order to best help clients:
Lack of cash. “There are a few instances where it makes sense to take Social Security early,” said Hans Scheil, a certified financial planner at Cardinal Advisors in Cary, N.C. “The most obvious is if the client just needs the money.”
There is no reason to delay Social Security if they cannot get by without it, he added.
“The risk here is that they could be severely decreasing the amount of money received over time,” Scheil said. “The reward is that they get to continue living and paying bills.”
Ill health. Poor health is another obvious reason to take early Social Security early.
“If someone is going to have a shorter lifespan, taking Social Security early could mean that they actually get more money in the long run,” Scheil said. “In this case, it’s important to consider if they are going to affect the surviving spouses benefit.”
If Social Security is taken early and the client passes away, it can affect their spouse. If the spouse’s plan is to collect off client’s record, he or she could have a smaller check for the rest of their life, Scheil noted.
“Financial professionals can help clients calculate all this if they are considering taking their check early,” he said. “The risk here comes from if the client does not pass early. They would be missing on a possibly larger sum of money.”
As a portfolio investment strategy. Most calculations that compare taking benefits early versus waiting rarely factor in the opportunity cost of drawing down other assets to get more money from Social Security, said Michael Dinich, registered financial consultant and founder of Your Money Matters, in Scranton, Pa.
“With the sequence-of-return risk, research has proven that losses in a portfolio are more damaging in the early years opposed to later years,” he said. “Depending on the asset allocation, it may be better to draw on Social Security benefits in the earlier years, and rely on savings in the following years compared to the inverse scenario.”
Additionally, other assets and income sources need to be considered, Dinich said.
“Consumers may have pension options that may afford the opportunity to take Social Security early,” he said.
Political risk. Many retirees just don’t trust politicians and believe there’s a possibility Congress will change the rules on Social Security.
“Recently, they have eliminated file-and-suspend, closed the door to restricted application, change the formula for cost-of-living adjustments, and secretly have been extending the retirement date,” Dinich said. “In addition, the GOP has consistently mentioned they intend to adjust Social Security, Medicare and Medicaid. I certainly understand why retirees would be distrusting and would not want to delay taking benefits at the expenses of consuming other assets.”
Excessive income. If you’re financially secure and have excess income relative to your needs, you might want to take benefits early, said David Freitag, a financial planning consultant with MassMutual.
“The Social Security income for these fortunate folks can be diverted into legacy giving programs for children, grandchildren or charities,” he explained. “There are powerful ways to leverage Social Security income to create new capital. This new capital can then be used to really change the quality of life for those in need.”
It’s not always ideal to take Social Security early. But life happens, and events can lead a retiree down that faster road to a monthly Social Security check.
An empathetic and informed advisor can be a crucial partner in making this important decision.
Brian O'Connell is a former Wall Street bond trader, and author of the best-selling books, The 401k Millionaire and CNBC's Guide to Creating Wealth. He's a regular contributor to major media business platforms. Brian may be contacted at firstname.lastname@example.org.
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