When Should Clients Claim Social Security? 7 Things to Consider
A key retirement issue for many people is when they should claim their Social Security benefits. While eligibility begins at age 62, this isn’t necessarily the right time to claim benefits. Deciding when to claim their benefit is a vital part of overall financial and retirement planning.
There is generally no single right answer. The claiming decision is about running various sets of numbers, looking at the client’s personal and health situation, and making some reasonable assumptions.
Here are seven considerations that can help decide when to claim Social Security benefits:
Employment Status
If your client has not yet reached their full retirement age and is employed or self-employed, any earnings over the earning limit will significantly reduce their Social Security benefit. For 2023, this reduction is $1 for every $2 of earned income over the limit of $21,240. In the year they reach their full retirement age, the limit increases to $56,520, with a benefit reduction of $1 for every $3 of earned income above this threshold. There are no earnings limits once they have reached their full retirement age.
If your client is working and their earned income exceeds these limits, it makes sense for them to wait to claim their benefits until they reach their full retirement age at 66 and a few months up to age 67 for those born in 1960 or later. While any benefits that are reduced will be received once they attain their full retirement age, it generally makes sense just to wait in this situation.
Break-even analysis
A break-even analysis looks at the lifetime financial impact of claiming Social Security at various ages. For example, if your client is considering taking their benefit at age 64, a break-even analysis can illustrate the difference over time between claiming their benefit at 64 and waiting.
The analysis will show how long they need to live until claiming at a later age yields a higher cumulative lifetime benefit. This analysis can then be used as a basis to factor in other considerations in the claiming decision, such as your client’s health and potential longevity.
Health and Longevity
While nobody can predict how long they will live, clients with health issues or a family history of decreased longevity might be inclined to claim Social Security earlier. You can help quantify the effect of this decision for your client by doing a break-even analysis illustrating the lifetime impact of claiming their benefit at various ages. This can help illustrate several options for the client which can be factored against any health or related concerns they may have.
For married couples, the health of the spouse should also be considered. In some cases, it makes sense for one spouse to claim their benefits early. This might be appropriate if that spouse is in poor health with a shorter life expectancy or as a way to balance out the other spouse waiting until later to claim.
Marital status
When working with clients who are married, it's important to consider each spouse’s benefits, as well as the effect of the claiming decision on survivor’s benefits. There can be a number of factors at play here.
First, if there is a significant difference in benefit levels between the two spouses, it often makes sense to have the spouse with the higher benefit delay taking their benefit, perhaps to age 70. This will ensure the largest survivor’s benefit for the spouse with the lower benefit.
This assumes that the spouses are relatively close in age; if there is a wide age gap this may not be as applicable. Note also, if the higher-earning spouse dies before claiming their benefit, it could affect the amount of the survivor’s benefit.
Tax Planning
What does the client’s tax situation look like now versus in the future? The threshold for triggering tax liability on their Social Security benefits is fairly low. If your client is in a relatively high tax bracket early on in retirement, it can make sense to wait to claim their benefits. This of course will depend on looking at other factors mentioned here.
Source: ALM Think Advisor: https://www.thinkadvisor.com/2023/09/19/8-factors-that-influence-when-clients-should-claim-social-security/
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