When affluent investors ask questions to their financial advisors, some of the answers are easy to come up with and others are difficult. One question that is likely to come up for which the answer requires much research and consideration of an investor’s personal needs relates to Social Security.
When it comes time for investors to consider receiving Social Security benefits, there are complicated questions that must be answered related to age, work history, current work status, and life expectancy. It also matters whether the person considering Social Security is married, ever was married, or lived their entire life without entering into marriage.
Furthermore, Social Security decisions are impacted by whether a married couple has or had two incomes, or whether one member was the primary or singular breadwinner.
It is estimated that for couples approaching the age when social security benefits can first be accepted (which is 62), there are 8,000 permutations of the decision whether neither, one or both should start taking benefits immediately or should wait for a more optimum time. For an advisor working with a couple for whom Social Security benefits matter, knowledge of those 8,000 permutations, or at least the ones that apply to the investors in question, is imperative.
“Social Security was designed to be a financial protection for Americans once they got too old to work,’’ said Spectrem president George H. Walper Jr. “it’s role has expanded for many Americans to be a vital part of their retirement plan. Advisors must ask their clients what role they plan for Social Security in their late-life financial plans.”
Some of those questions were asked in Spectrem’s Social Security white paper Social Security: When and Why. In the report, married investors segmented by whether there was one primary income in the family or two were asked about their plans for taking Social Security benefits. In households with two incomes, it was more likely one member of the household began taking benefits immediately, while the other waited.
The first piece of information to gather is how important Social Security benefits will be to a couple’s financial future. All decisions about when to begin receiving benefits will spring from the answer to that question.
Advisors should not assume that extremely wealthy investors have no need for or concern over social security benefits. Social Security provides income, and the Spectrem white paper shows that even high net worth investors plan on their Social Security benefits to provide at least a portion of their annual income.
There is another question that must be asked early in any conversation regarding Social Security benefits, and it is a tricky question. Advisors need to ask their clients “How long do you believe you will live?” A person’s anticipated longevity goes a long way to making the correct Social Security decision. If an investor believes he has a long life-span, he should wait to take his benefits as long as possible. If a shorter life-span is anticipated, the benefits might come in handy sooner.
Other factors that create or pare the 8,000 permutations of Social Security choices include the following information:
Everybody has a different “normal retirement age’’ based on the year they were born. While the normal retirement age was 65 years of age for many years following the establishment of Social Security, it now ranges to as high as 67 for people born after 1969. That age matters only if the person receiving benefits wants to keep working past that age. If so, their benefits are reduced until such time as they stop working.
Investors can begin taking their benefits at any age between 62 and 71, creating 10 different choices immediately. In fact, the percentage of Social Security benefits an investor receives changes with every month they age, which creates hundreds of choices with just that one factor.
In general, the longer an investor can wait on receiving benefits, the more income they will receive over the long term, if there is going to be a long term.
When a married couple has one primary breadwinner, that person should wait as long as possible to take benefits, while the lesser earner can consider taking benefits as early as possible, if the income is a significant part of the couple’s retirement income. If both members of the household contributed significantly to Social Security, and there is no immediate need for the income from benefits, then both members can wait to maximize their total benefits received.
If both members of the household had similar work histories and thus have similar Social Security benefits coming, the permutations multiply and the decision becomes even more complicated.
If a member of the household never worked, they can receive spousal benefits. These details are complicated and must be discussed with the couple.
Social Security is a concept that has been applauded by Americans for as long as it has existed, and for many investors it is a significant source of income post-retirement. But it is a complicated consideration and advisors must be ready to help investors make the decision that will best serve their financial needs.
Top Takeaways for Advisors
Determine how important Social Security benefits are to your clients, and then determine the best way for the couple to take advantage of the system’s rules regarding married couples and benefits.
Discuss life expectancy for both members of the couple. This will be a factor in determining the best time for each member of the household to begin accepting benefits.