There’s a great need in our industry for education about
optimal Social Security claiming strategies. Clients often want to claim early,
but they seldom consider how taxation will impact the overall size of their
benefit and the longevity of their portfolio. Unfortunately, many wealth
managers, including CPAs, also don’t appreciate the complexity of these
calculations and haven’t made an effort to educate themselves. How can you call
yourself a wealth manager if you can’t account for the disastrous impacts of
taxation on your clients’ bottom line?
While there are legitimate reasons to claim early, clients
often use faulty logic when they decide to collect at age 62 instead of
waiting. They may start collecting now because they’re afraid that the
government will cut their benefits. Or they may think that 62 is the right age
to collect simply because that’s when their parents collected. They don’t
appreciate that changes to Social Security are very unlikely to affect anyone
who’s now approaching retirement age, or that life expectancies are much longer
today than they were for their parents’ generation.
One of the biggest gaps in knowledge relates to the tax
implications of various claiming strategies. Although most advisers understand
that Social Security income is only taxed above certain income thresholds, they
often haven’t calculated what this means in real terms for client sitting in
front of them. I think many of us are missing opportunities to lower our
clients’ overall tax bills and extend the lives of our clients’ investment
Every situation is different, of course, but generally speaking
there are tax advantages for clients who delay taking their Social Security
benefits. Yes, clients may pay more in federal taxes while they wait for their
Social Security benefits to start and they rely more on their taxable IRA
income. However, they could be living nearly tax-free after age 70 when that
tax-favored Social Security income kicks in and their taxable income drops
sharply. Combined with the higher monthly benefit that the client receives for
delaying their claim, our models show that these tax advantages can amount to a
significant net benefit over the course of the client’s retirement.
Whether you’re an adviser or a client, the takeaway when it
comes to claiming strategies is that what you don’t know can hurt you. People
have a lot of misguided assumptions that drive their claiming decisions, and
advisers often don’t have sufficient knowledge to assess the true overall
impact of various approaches. As an industry, we really need to roll up our
sleeves and work harder to help people identify the smartest strategies.
here to access the full article on The Wall Street Journal.