When it makes sense for clients to resist the temptation to cash in on benefits early
Many of your clients may understand that waiting longer to collect Social Security benefits results in higher monthly payouts. Yet 40% of Americans 50 and over say they plan to start collecting benefits before their full retirement age, according to a recent poll.
For some people, cashing in as soon as possible on Social Security makes sense. For instance, some clients may be in poor health and not expect to live as long as the average Social Security recipient. Others may need the money to cover basic living expenses. But for many clients, claiming Social Security benefits early could be a costly mistake. Here are three reasons to encourage your clients to practice delayed gratification:
Collect more over time
The longer your clients wait to collect Social Security, the more they'll take home each month—up to age 70, after which the amount stops increasing. For example, consider someone who will collect $1,000 per month if he files at his full retirement age of 66. If he files at age 62, he will collect $750 per month. If he waits until age 70, he will receive $1,320 per month—32% more than at full retirement age, and 76% more than at age 62.
At first glance, it may seem that filing early results in the accumulation of more money over time. But if your clients wait to file until their full retirement age or later, at a certain point the bigger monthly checks will actually result in a greater total sum. This point, the break-even age, differs from person to person, but it generally falls within a few years of the filer's average life expectancy. Remind your clients that many people exceed their average life expectancy, with more than one in three 65 year olds living to age 90, and more than one in seven reaching age 95.
Work without giving up benefits
When clients file for Social Security before reaching their full retirement age but continue to work, a portion of their benefits may be withheld. When your clients reach full retirement age, on the other hand, they can work and still collect full Social Security benefits, no matter how much they earn. Still, for those still earning a salary, up to 85% of Social Security income can be taxed, so clients who plan to work in retirement may want to delay claiming benefits as long as possible.
It may also be helpful for your clients to remember that they're likely approaching the peak of their earnings at the same time they approach retirement. Continuing to work up to or beyond their full retirement age allows them to take home more in salary, make catch-up contributions to retirement accounts and eventually claim a larger Social Security benefit. What's more, Medicare doesn't kick in until age 65, so clients who stop working and begin taking Social Security at age 62, for example, may have to pay for private health insurance for three years.
Leave more for your spouse
For married clients in which both partners work, the couple can file at different times or at the same time, depending on their overall retirement strategy. As with single clients, the big question remains how long the couple expects to live. For couples with similar ages and incomes who expect to live a long life, deferring generally means a higher combined benefit. In couples where only one partner works, the non-working partner may be eligible for a spousal benefit but will collect more if the working spouse delays filing.
When one spouse dies, the surviving spouse is often entitled to the deceased partner's Social Security benefits. If the deceased partner started receiving a reduced benefit at age 62, the surviving spouse would also receive a reduced benefit. But if the deceased partner had delayed his or her benefit, the surviving spouse would receive a bigger check. That means waiting longer to take benefits results in a bigger monthly check for the rest of the spouse's life.
It's tempting to start cashing in on Social Security as soon as it becomes available. But unless your clients need the money or have reason to expect they won't live long, most will be better off waiting.