Retirement should be a time when your clients glide into the most peaceful and satisfying years of their lives. A time when finances aren’t so critical, and decisions are carefree.
However, things have changed, and some trends have reshaped our traditional view of retirement.
One factor you may have heard discussed by some retirees is “Social Security regret.” This describes a situation when retirees feel like they made a mistake in their decision to claim their Social Security benefit. Many individuals feel they began receiving benefits too soon.
It’s hard to overstate the importance of discussing Social Security years before retirement, to allow ample consideration before making the decision about when to claim. Here are a few ways you can help your clients avoid taking Social Security too early.
Fast Facts on Filing for Social Security Early
While it’s certainly possible for individuals to retire at age 62 rather than wait until full retirement age (which is dependent on their date of birth) to start receiving their Social Security benefits, those who choose to claim early could see a reduction in those benefits of up to 30 percent.1
At the same time, those who delay taking benefits could see a substantial increase in their monthly benefits.1 Delaying Social Security benefits until age 70 could result in a 77 percent increase compared to claiming benefits at age 62.2 With that in mind, depending on a client’s individual circumstances, it may be wise for an advisor to encourage waiting before filing for benefits.
In addition to the many other considerations for starting benefits early, the COVID-19 pandemic has affected how people think about their finances, including Social Security. According to a recent survey, 63 percent of respondents agreed with a statement indicating that the government shouldn’t penalize those who file for their Social Security benefits early since COVID-19 has forced some people into retirement before their planned departure from full-time work.3
But current policy doesn’t account for these changed circumstances, so those nearing retirement age still need to inform their decisions with today’s rules. What options do they have, and what can advisors do? Here are a few scenarios you may encounter with clients and some approaches to consider as you seek solutions:
“I no longer want to collect Social Security early. What are my options?”
You can explore three options with clients who have already filed for Social Security. A client wanting to reverse their decision can…
- File form SSA-521, Request for Withdrawal of Application, to rescind their claim. This is possible if an individual has not yet received a full year of benefits. In addition, benefits received must be repaid.4
- Continue working and have some benefits withheld. Those younger than retirement age still working will have $1 in benefit payments deducted for every $2 over a certain amount ($18,960 as of 2021) which can then be distributed once retirement age is reached.5
- Voluntarily suspend benefits if they have reached full retirement age. A client will then start to receive delayed retirement credits that will result in a higher benefit payment by age 70.6
“I’m not yet retired. What steps can I take now?”
The well-worn adage, “An ounce of prevention is worth a pound of cure,” applies here. Developing a plan with your clients well before retirement helps them understand their options and reduces the potential for a regrettable decision later on.
Identify opportunities to bring up the subject with clients who are approaching retirement. They may not have fully considered where their monthly income will come from or what their options are. You might recommend that the spouse with the record of higher earnings defer their benefit longer, which can help maximize the survivor benefit for the spouse who outlives the other.
Those clients who are still working may be interested in the potential benefits of deferral by using some of their retirement savings to purchase an income annuity, and defer payments for a number of years. A deferred income annuity can help clients create a personalized, guaranteed income stream to supplement their Social Security benefits later.
“I have some concerns about waiting until 70.”
With Social Security in the hands of government officials, some clients may feel uncertain about its solvency. Social Security is a frequent hot topic with Congress, and the Social Security Administration itself warns that some of the Social Security funds are projected to be depleted by 2033 and 2034.7
It’s understandable for clients to grow concerned about their Social Security benefits as they age and the world around them changes. Add pandemic-related anxiety into the mix and financial decisions have the potential to become even more stressful.
You may also encounter cases where clients simply need the money now. Even though delaying their claim could increase their future Social Security payments, those clients may choose to start receiving payments now, if they believe that’s income they can’t live without. Situations like this may call for a closer look at options including single-premium income annuities, which can help clients convert a lump sum of money into monthly payments they won’t outlive.
Some of your clients may also be feeling skittish about investing because of potential market risks and financial insecurity due to the COVID-19 pandemic. They may not be aware of annuity options that allow them to set their “comfort zone” on portfolio performance linked to index returns. Solutions that offer clients greater individual choice between upside potential and downside risk control can help them diversify their portfolio and approach retirement with greater confidence.
Get your copy of Risk Control Accounts: Limiting the Downside, Providing Opportunity for Higher Returns now.
1Social Security Administration, Starting Your Retirement Benefits Early
2Social Security Administration, When to Start Receiving Retirement Benefits, January 2021
3Nationwide Financial, The Nationwide Retirement Institute® 2021 Social Security Survey, June 2021
4Social Security Administration, Withdrawing Your Social Security Retirement Application
5Social Security Administration, How Work Affects Your Benefits
6Social Security Administration, Suspending Your Retirement Benefit Payments
7Social Security Administration, A Summary of the 2021 Annual Reports