“With our government not functioning well these days, I am taking my benefits ASAP!”
If you are like many advisors, you have heard your clients share the above phrase. They feel that after paying Social Security taxes for their long working lives, it only makes sense to pull it out as quickly as possible before the government reduces it or removes it completely. This point is emphasized more when we discuss the current state of politics in Washington DC.
As advisors, we know that filing for benefits at age 62 is the right move for some people. There are individuals forced into early retirement for health reasons who need help paying for medical care before Medicare kicks in for them at age 65. Other people who retire early for a variety of reasons may need the money for day-to-day expenses, or to pay off high-interest debt. If your clients have health issues or they don’t expect to live to 70, their total benefits may be greater if they start collecting earlier.
But as a 64-year-old man who retired after a 40-year rewarding career as a financial executive and professor of accounting, I want to share some reasons why it is a better idea to delay your clients’ Social Security benefits for as long as possible. Foremost, higher future prices combined with greater medical expenses in our older years make it critical to ensure our income and investments can support our longer lives.
Why I Delayed Taking Social Security
As my retirement approached in 2021, my wife and I collaborated closely with our financial advisor to determine what our income streams would be during retirement. Since I turned 62 in December 2021, I needed to decide whether to start collecting Social Security benefits right away. But this wasn’t a new conversation for us: To lay the groundwork, we had started planning with our financial advisor 12 years earlier, when I was 50.
We met regularly with our advisor to discuss current issues (including a debt- paydown plan) as well as longer-term issues (401(k) plans, Social Security and other retirement vehicles) to ensure we were well-prepared for retirement. To increase my benefits overall, I chose to delay my Social Security benefits until at least my full retirement age (FRA) of 66 years and 10 months. This will occur in October 2026 —which is less than two years away!
Reasons to Convince Clients to Delay Social Security Benefits
With that background in mind, let’s discuss some of the primary reasons it makes sense for your clients to delay their Social Security benefits, as follows:
1. Reduced Monthly Payouts
While your clients can start receiving their Social Security benefit at 62, they won’t be eligible for the full amount until they reach their “full retirement age (FRA).” This varies according to the year of their birth but falls somewhere between their 66th and 67th birthday.
If your clients turn 62 this year and decide to claim their benefit, they will receive a whopping 30% less than they would obtain by waiting until full retirement at 66-67, according to the Social Security Administration (SSA). And if they wait even longer, their entitlement will increase more each month until they turn 70, at which point it maxes out. Your clients may be confused by these three critical age points, or they may be confused about how it applies to their personal situation.
2. Putting in Extra Years of Work will Payoff
The SSA calculates your benefits on your 35 highest years of earnings. So, if your clients’ career is shorter than 35 years, they will leave retirement income on the table. As an example, if you have a 32-year earning history that ends at age 62, SSA will determine your benefit not by calculating average earnings over those 32 years but by averaging those 32 years plus three years’ worth of zeros. Clearly a string of zeros will not help your clients’ benefit calculation!
3. Your Clients Achieve Better Protection Against Inflation
As 2022 taught us with its inflation rate of 8.0%, inflation can have a major impact on our clients’ retirement needs. While the average inflation rate over the most recent decade of 2014-2023 has averaged 2.7%, inflation in 2022 hit its highest level in four decades, according to consumer price index (CPI) data. Many Americans worry about the rate at which inflation will chew up their hard-earned retirement savings built up in 401(k)s, IRAs and other retirement accounts.
Additional Reading: Do Your Clients Really Understand Their Net Worth?
In 2023, Social Security recipients received the largest cost-of-living-adjustment (COLA) in decades — 8.7% —due to historic elevated levels in inflation. Because the COLA is calculated as a percentage of your benefit, waiting to claim your benefit translates into a larger monthly benefit to offset the pain of inflation.
4. Avoid Paying More Taxes in Retirement
Many clients don’t realize that their Social Security benefit is potentially taxable. If their “combined income” — which includes taxable withdrawals from retirement accounts plus 50% of their Social Security benefit — exceeds certain thresholds, they can potentially pay a tax on as much as 85% of their monthly benefit … ouch! This potential rate kicks in when combined income exceeds $34,000 for taxpayers filing an individual return and $44,000 for married couples filing joint returns.
To avoid this scenario, they should try to minimize the percentage of their retirement income coming from taxable withdrawals, from such investments as traditional 401(k)s, while maximizing the percentage from Social Security. The best way to increase their benefit is to delay their benefits for as long as economically feasible.
An Example
Suppose that over and above the $34,000 or $44,000 thresholds, you need another $5,000 a month from Social Security and retirement accounts to cover expenses. Perhaps you have a job or have a lot of investments in taxable accounts where you will only be taxed on capital gains. Still, you aren’t sure if you should keep working or take money from the taxable accounts. You want to consider what if you stopped working or didn’t take money out of those taxable accounts. Instead, you wonder if you should take Social Security now and supplement it with money from your traditional retirement accounts, where taxes were deferred.
Let’s say that if you take Social Security now, you will get $3,000, but if you want until you’re 70, you’ll get $4,000. The following shows how total taxes can vary depending on your Social Security benefit and where the balance of necessary income will come from.
| Income Sources | Taxes |
|---|---|
| Now | |
| $3,000 Social Security | $1,500 (50%) |
| $2,000 401(k) | $2,000 (100%) |
| $5,000 | $3,500 (57% taxed at 100%) |
| 70 years old | |
| $4,000 Social Security | $2,000 (50%) |
| $1,000 401(k) | $1,000 (100%) |
| $5,000 | $3,000 (33% taxed at 100%) |
5. Your Clients Could Deprive Their Spouse of Higher Benefits
If your clients are happily married, like me, it is particularly important to consider what would happen when one spouse dies before the other. In that case, a widow or widower could potentially receive a larger monthly payout through Social Security Survivor benefits than the benefit they’d received based on their own work history.
But if the now-deceased spouse chose to collect reduced benefits at a younger age , the Social Security Survivor benefits will also be reduced because it’s based on the decedent’s benefit. In other words, your client’s decision of when to take claim Social Security benefits affects both them and their spouse.
Since I am a healthy person and exercise moderately, there is a good chance I will live into my eighties. Hypothetically, if I live to 85 and I qualify for the average Social Security benefit of $1,800 per month, my total benefits received will be approximately $390,000 if I start my benefits at FRA versus $360,000 if I started earlier at age sixty-two. If I live until age eighty-five, I stand to receive significantly more Social Security benefits ($30,000) than I would by collecting early at age 62. Many of your clients will be eligible to collect greater Social Security benefits than me because of their higher income levels.
Collection Trends
The most popular age for people to begin claiming Social Security Benefits is 66 (34% of claimants).This is the age when those born between 1943 and 1954 are eligible to claim full Social Security benefits. The good news is people are becoming more educated on this confusing Social Security benefit timing issue and waiting for the higher benefit payouts later. But the second most popular age to sign up for Social Security is 62. (30% of claimants). Although this is down from 50% in 2005, it still suggests there is room for education.
Ideas to Help Boost Your Clients’ Retirement Savings
With growing concerns about the financial health of these federally subsidized programs, it’s important to remind clients of how they can boost their retirement savings. Here are a few things they may not be tackling on their own.
- Maximize the company match. According to Vanguard research, 24% of employees are saving below the employer match and 22% are not participating in their workplace retirement plan. In 2024, you can contribute up to $23,000 ($30,500 if you are age fifty and older). For my wife and I, these 401(k) matches were an important method for building our retirement portfolio and enabling us to retire early.
- Contribute to a Roth IRA to increase retirement savings. Single taxpayers earning more than $161,000 in 20224 and joint taxpayers earning over $240,000 cannot contribute to a Roth IRA but they can convert pretax contributions into a back-door Roth IRA. [https://rethinking65.com/backdoor-roths-are-powerful-if-done-right/]
- Save in a health savings account (HSA). An HSA allows you to put money aside to pay for unexpected medical expenses. Contributions are tax-deductible if you spend the money on qualified medical expenses (e.g., payments to doctors and other medical practitioners, prescriptions, insulin, X-rays and laboratory tests, eyeglasses and contact lenses, and nursing help and hospital care.) Unused funds could continue to grow indefinitely, particularly when invested wisely. My wife and I have our HSA invested in low-risk and low-fee stock funds.
‘No Perfect Strategy’
There is no “perfect strategy” to maximize Social Security benefits over your clients’ lifetime. My advice is to have your clients set up their own online Social Security Account at www.ssa.gov/myaccount. This allows them to review their estimated monthly benefit under various assumptions — helpful for retirement planning and related discussions.
Another good reason to open a Social Security account now: If a client doesn’t already have one, an identity thief who gets their Social Security number could use it to create an account in your client’s name and claim their benefits.
Greg Davis is the author of “Checkmate: Tips & Lessons to Help You Make the Right Moves to Achieve Happiness!” Now retired, Greg holds numerous certifications and was an award-winning University of Illinois professor of accounting as well as a senior finance executive at Hershey Entertainment & Resorts.
