Reframing Social Security Claiming Decisions

Sep 15, 2020 / Amanda Chase, Horsesmouth Assistant Editor

One of the key financial decisions facing older Americans is when to claim Social Security retirement benefits. The timing affects how much they will receive for the rest of their lives. Unfortunately, most people do not claim Social Security at their optimal age but instead claim too early. Financial advisers can play a critical role in reframing how their clients think about their Social Security claiming decisions by referring to the earliest eligibility age of 62 as the “minimum benefit age” or “reduced benefit age” and describing age 70 as the “maximum benefit age,” to focus on benefit size.

Breakeven analysis tends to result in earlier claiming ages because it frames later claiming as a risky gamble on living longer than average, the report said. Instead, framing delayed claiming as a “gain” and using a later claiming age as the reference point to which other claiming ages are compared have both been found to increase planned claiming ages.

At a time when few people have a traditional annuity or employer-provided defined-benefit pension, Social Security is often the only source of retirement income that beneficiaries cannot outlive. This hedge is especially important since people are living longer on average and tend to underestimate their life expectancy and consequently the costs associated with their retirement. The Social Security Administration projects that an average 62-year-old man will live to age 82 but that 15% will reach 92. Similarly, SSA estimates that the average 62-year-old women will live to 85 but 14% will live until at least 95.

The downsides of claiming early hit widows especially hard, since the average women outlives her husband by six years. Social Security survivor benefits are worth up to 100% of what the deceased worker was collecting or entitled to collect at the time of death. When a worker claims early, it can reduce the survivor benefit.

Of course, not every client can—or should—delay claiming their Social Security benefits to optimize lifetime income. A job layoff due to COVID-19 or a similar financial shock are certainly reasons to consider claiming benefits early. But advisers should help their clients understand that retirement age and claiming age are two separate decisions.

You can find the full article at InvestmentNews.


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