The Social Security claiming decision is often considered in isolation, apart from the many areas of a person’s life it affects. I’ll be the first to admit that I tend to focus on the math of it, relying on our very robust calculators to generate claiming scenarios showing lifetime benefits for each scenario. After all, wouldn’t any client want to choose the scenario that pays the most benefits over a lifetime? Focusing on lifetime benefits helps reduce the short-sightedness that causes most people to claim in their early 60s.
One flaw in this math-centric approach is that the estimate for lifetime benefits necessarily hinges on life expectancy. “I could die tomorrow,” is the classic retort by people who are determined to claim their Social Security as early as possible. “Yes, but you could also live a long time,” is the classic response, “and wouldn’t you want to maximize your income later in life in case you do?” And around you go, debating life expectancies, haggling over dollars now versus dollars later, and perhaps even getting into Trust Fund conversations and whether our government can be trusted to keep the Social Security system solvent.
Maybe the best approach is to talk about Social Security in terms of overall life planning. If clients want to start the conversation with Social Security, first answer their questions and then remind them that Social Security does not exist in a vacuum. The decisions made around Social Security affect other areas of their life as well. If they want to start the conversation with life planning, insert the Social Security part where appropriate. Some people have no idea how much their Social Security may be impacted by certain life decisions, even if they’re now nowhere near retirement.
Work
Because Social Security benefits are directly related to earnings, decisions made around work have a bigger impact on a person’s eventual Social Security income than any other life decision. Yet people typically don’t think about Social Security when making work decisions. If they are motivated by money—that is, when career decisions are based on salary and promotion opportunities—the Social Security will take care of itself. But if they are motivated by something else, the Social Security part may suffer. This is when a gentle tutorial on the connection between lifetime earnings and Social Security retirement income may be called for.
My eldest daughter became a teacher because she loves kids. She’s very good at what she does and her job is extraordinarily satisfying. But the pay has always been low. Now she’s 50, thinking about retirement, and getting ready to change careers in order to boost her savings and eventual Social Security benefit. Where once her work decisions centered around what would give her life meaning, at this stage the decisions focus on pay potential. (She’s been talking to her mother.)
For many people, the decision to stop working is the best life-planning decision right now. They’re financially set, are no longer defined by their job, and believe their life will be enhanced by activities that neither pay a salary nor improve their Social Security benefit. In fact, they may be thinking about reaping the rewards of all that Social Security income they are now entitled to. Depending on their age, these clients may benefit from a “retire now, claim later” discussion, where you encourage them to decouple the (stop) work decision from the (start) Social Security decision.
Although work and Social Security are interconnected, sometimes a deliberate disconnect is called for—as in when a high earner under 70 wants to stop working. One solution for those under 70 is the so-called bridge option designed to generate income between the date of retirement and the ideal Social Security claiming age. These options might include an annuity, a bond ladder or a systematic withdrawal plan.
Health
Then there are the clients whose work decisions are forced upon them. My friend Bonnie, a real estate attorney, discovered in her mid-60s that she was cognitively challenged by her work. She wasn’t financially ready to retire, but she could no longer keep straight the myriad facts and people and checklists required to do a good job for her clients. She decided to retire before making some terrible legal mistake. Even though she could have used the income, I managed to convince her to wait until 70 to claim Social Security, and now she’s glad she waited.
I’ve seen a number of studies pointing out the relatively high number of people who retire earlier than planned because of health reasons. I won’t cite statistics here, because what matters is each client’s individual situation. When health is an issue, it trumps everything.
You may still encourage certain clients to claim Social Security at 70 (namely high-earning spouses), but now you would be incorporating the client’s health status into the overall plan and tending to the financial fallout arising from the cessation of a paycheck. Some clients may have no choice but to start Social Security early. If they are under FRA and truly disabled, they can apply for Social Security disability benefits and receive their full PIA rather than a reduced retirement benefit. (The payment of disability benefits is one of those “insurance” aspects of Social Security that is often underappreciated; the other is payments to widows and children.)
On the flip side, clients in good health who consider their work an integral part of their life might keep working into their 60s, 70s, even 80s. This can only be good for the financial plan as well, of course. Their earnings will continue to be recorded for Social Security, and as long as a new year of higher earnings replaces an earlier year of lower earnings on their 35-year record, their benefit will continue to rise, along with DRCs (to age 70) and COLAs (forever). For clients who are able and willing, the easiest way to maximize benefits is to keep working and claim at 70. Those who keep working and claim before FRA are asking for trouble (of the administrative sort). Just make sure they understand that although their benefits are being withheld they are not being penalized for working. They are penalized for claiming early. They can avoid the penalty by claiming at FRA or later.
Regardless of health status, you’ll want to have the Medicare conversation starting at age 63 or 64. Early retirees and clients covered by a plan that covers fewer than 20 employees should plan on transitioning fully to Medicare at 65. That includes enrolling in Parts A and B and signing up for either a Medigap policy and drug plan or a Medicare Advantage plan, all designed to start the first of the month the client turns 65, dropping existing insurance at the same time. For those still working and covered by an over-20 plan after 65, a comparison should be made between their existing insurance and Medicare. If the employer plan is better, they can stay on it until they leave employment; if not they can switch to Medicare. If they are staying on the employer plan and it is not an HSA, they can enroll in Part A for additional hospital coverage.
Marital status
Marital status factors into the Social Security claiming decision in a number of ways. Here, you not only need to be aware of a client’s marital status at the time you start working with them, but also any changes in marital status in the course of your work. Spouses die, couples get divorced, single people marry—all of these events impact the overall financial plan.
Where clients have a choice, either to marry or divorce, you can play out prospective scenarios in order to help them decide. Social Security may be the last thing on a person’s mind when they are thinking of marrying or divorcing, but it’s one more thing that should go into the marital decision. I’ll never forget Joyce, who learned at one of our workshops that if she married her longtime partner Bruce, she could collect a spousal benefit while her own benefit grew to age 70 (she was grandfathered for restricted application under the Budget Act.) Bruce had been wanting to get married; Joyce was on the fence. This little piece of information tipped her over, giving her more than $30,000 in unexpected benefits.
When the marital event is sudden, as in the death of a spouse, you are there to show compassion and revise the financial plan as necessary. There may be a lot to talk about before you get around to Social Security, but at the very least you’ll want to help her claim her $255 lump sum death payment. If she is already receiving a spousal benefit off her deceased husband, SSA will automatically switch her over to her survivor benefit. If not, you’ll need to do some strategizing to help her decide when to claim her survivor benefit and how to coordinate it with her own retirement benefit.
When the event hasn’t happened yet but probably will, as in the death of a spouse, your job is to play out that scenario and advise the couple to do what’s necessary now to mitigate the impact on the surviving spouse later. The Social Security part of this is to advise the higher-earning spouse to claim at 70. But there’s so much more to widowhood preparation. A key part of it is educating the prospective widow on the details of the financial plan so that when the time comes there will be little disruption in the advisory relationship—you will be one of the first people she calls, and you can continue the life-planning conversation based around the trust you’ve already established.