It’s not an understatement to say that for those nearing retirement and their advisors, Social Security is always in the spotlight.
It’s also accurate to say that scenario is amplified following the Social Security trustees’ recent report that the system’s trust fund will be depleted in 2033 and that it’s possible that date may be even sooner. Fortunately, current recipients are in no danger of dramatic, if any benefit reductions and for those that are getting close to claiming, they’re likely to get the monthly benefits they’re expecting.
Still, the state of the system and many workers’ needs for immediate income upon retirement has many debating exactly when to claim Social Security, underscoring the need for those workers to hammer out the details with advisors.
“You can start receiving your Social Security retirement benefits as early as age 62. However, you are entitled to full benefits only when you reach your full retirement age,” according to the Social Security Administration. “If you delay taking your benefits from your full retirement age up to age 70, your benefit amount will increase.”
Translation: Age may not matter in love, but it’s a huge consideration with Social Security.
Running the Numbers
Due to concerns about the health of the system, more than half (51%) of the respondents in a recent Nationwide survey said they plan on claiming benefits as soon as they’re eligible, or 62 years old. That’s a logical response, but it may not be the winning one.
As Nationwide points out, someone that claims benefits at 62 may subject to a 30% reduction in lifetime payments compared to waiting until 67 years old. Those that take benefits at 62 may endure a 77% haircut compared to waiting until age 70.
“Future cost-of-living adjustments are calculated based on that lower benefit amount as well, potentially compounding the long-term impact of claiming early,” notes Nationwide. “Combined with the projected 22% across-the-board benefit reduction, claiming benefits as early as possible could reduce a client's monthly benefit to roughly half of what they would have received by waiting until full retirement age.”
Making the claiming age all the more important are clients’ own expectations. As just one example, 57% told Nationwide “they plan to use their full benefit to cover monthly expenses.”
The Importance of Income
Obviously, retirees’ income declines when they leave the workforce and Social Security isn’t a cure-all for that situation. Many workers are already hip to that fact with 25% telling Nationwide they’re viewing Social Security as a supplement to other retirement savings, not as defined benefit pension that can carry them through years of retirement.
That’s a smart viewpoint and one that is enhanced when advisors work with clients to devise superior income strategies can extend the Social Security claiming timeline, reduce dependence on those benefits or both.
“A diversified retirement income strategy can help clients prepare for common spending shocks, such as out-of-pocket healthcare and long-term care costs, while reducing reliance on Social Security and portfolio withdrawals to fund essential expenses,” concludes Nationwide. “For some clients, guaranteed income solutions can create another dependable source of income, particularly as living costs continue to rise.”
