21 January 2019

Social Security Claiming Strategies

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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 portfolios.

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.

Click here to access the full article on The Wall Street Journal.

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