Why clients should make the distinction between when to retire vs. when to claim
by Marcia Mantell, RMA, NSSAMs. Mantell is the founder and president of Mantell Retirement Consulting, Inc., a retirement business development, marketing & communications, and training company supporting the financial services industry and its clients. She is author of “What’s the Deal with®… Retirement Planning for Women” and blogs at BoomerRetirementBriefs.com.
Clients often make the mistake of thinking about their Social Security benefit as income replacement that starts the day after they leave their job to enter retirement. The fact is clients need to make two different and distinct decisions:
1. When to quit their job, retire and start enjoying a “meeting-free” life; and then,
2. When to begin drawing Social Security income.
The two decisions should be mutually exclusive. While they’ll eventually wind their way together into a comprehensive retirement income plan, keeping the two decisions separate will help clients proceed on a better road to retirement. Thinking that the two decisions go hand-in-hand may, actually, derail a lifetime of retirement paychecks from the beginning. Here’s why:
Clients Rarely Have All the Facts
Most clients only know small bits and pieces of Social Security’s rules. You’ll often need to set the record straight so they make the best decisions possible for long-range income. For example:
- A married woman decides to retire early and thinks it’s a good idea to replace some of her lost paycheck by claiming Social Security early. Have you shown her the impact of this decision in the short term and the long range?
- A 68-year-old single man has been planning to stop working and start Social Security when he reaches 70. He ends up retiring earlier than planned and wants to start Social Security two years before he intended. Have you discussed other options with him?
- A divorced woman feels that she can never retire. She spent 20 years at home taking care of the children and running the household. She’s got enough credits to qualify for benefits, but her estimated benefit is very low. Have you talked about divorced spousal benefits?
Advisors will better serve clients by providing a process to guide them through the sequence of key retirement decisions and not just Social Security claiming option choices.
Decision #1: When to Leave the Job?
When to leave the labor force is decision one and is not always under the client’s control. Each client can (and should) have a target retirement date in mind, and you can create an income plan that lines up with that date. They also need to recognize that someone else may be in the driver’s seat making retirement a necessity:
- Unhealthy or elderly parents who need care;
- A company that is downsizing or reorganizing; or,
- A spouse or partner who values more time together.
What a client will do with his or her new-found time is a key determiner when to step off the job. Each client has to figure out what to do with the 2,080 hours per year that are now unscheduled…and available for the next 30 years! It’s not always clear cut. Case in point: preparing to buy and run a vineyard requires a radically different plan than choosing to become a volunteer at the fine arts museum.
How you’ll talk about your clients’ options, emotions, and realities of filling their days once they retire is as significant as it is how to fund their ideas. To be clear, the decision to retire and what to do in the next phase of life, has little to do with when to claim Social Security. It’s about time, meaning, and fulfillment.
Decision #2: So, When Should Clients Claim Social Security?
Decision number two is centered around how to create an optimal paycheck when the employer paycheck stops. There are any number of good strategies to consider: interest only investments; creating a financial floor, then building an upside; a bridge strategy; or systematic withdrawals. Social Security is but one of income streams available to clients, and working to optimize or maximize this powerful resource can be vitally important.
When to submit the claim for Social Security should happen only when clients know how much they’ll need to produce a new paycheck from their myriad of resources, including retirement savings plans, IRAs, investments, and Social Security. In addition, clients must remember that the money has to last decades and respond to unforeseen crises and unplanned opportunities.
Key questions clients should answer before deciding when to claim their benefit include:
- What is the implication to my monthly income if I claim at one date versus another?
- Am I claiming at a time that will best protect my spouse if I die first?
- Do I want to spend down more of my own assets to pay for retirement or plan to leave a legacy for my children or grandchildren?
Use Social Security Statements to Help Clients with Both Decisions
To help clients navigate these decisions, start by doing a deep dive into each client’s Social Security statement. Ask clients to bring the most current copy of their Social Security statement to your next meeting. For most clients, it’s fast and easy to get their current statement:
- Go to SSA.gov/mySocialSecurity
- Set up an account or refresh as indicated
- Click open the Social Security statement and print it out
Seeing clearly in black and white whether or not a client has enough “good” earnings years to retire is often an eye-opener. Does your client have the requisite 35 years of earnings yet?
Even clients in their late 50s may not have a complete earnings history due to gaps in work years for graduate school, periods of time at home, or time off for sabbaticals or unemployment. Walking through clients’ career histories can help them assess what they want their future of work and retirement to be.
Looking at the estimated dollar amounts from Social Security can be a shock to many clients. Often, people have never given serious consideration to how far $2,000 or $3,000 per month will go when trying to live off that amount in retirement. It can be a sobering discussion.
What the Social Security Statement Tells You…
A client’s Social Security statement carries a wealth of information that can help clients make better decisions about how they will build a paycheck in retirement. When reviewing statements:
- Start in the top right corner of page 1. The estimated payment amount at Full Retirement Age (FRA) is big and bold. Is this more or less than clients expected? Do they understand that they only get that amount if they continue to work until their FRA, and claim at FRA? For most clients, that means working and waiting until after age 66.
- Focus next on the top of page 2. The statement clearly shows the dramatic reduction in monthly income if a client claims at 62 compared to the benefit of waiting until age 70.
- Page 3 is important for decision-making. Each person’s Social Security income is determined based on their own earnings history. The benefit calculation includes each person’s highest 35 years of earnings. Some clients will see that they have more than enough years and could consider retiring; others, not so much.
…and What It Doesn’t Tell You
A client’s Social Security statement doesn’t tell you the whole picture when it comes to the amount of retirement income. The estimated benefit shown is not the amount of money a client will receive. There are 5 potential reductions you’ll need to incorporate into estimate net Social Security payments:
1. Early Claiming Reductions – The statement shows an estimate for the earliest claiming age of 62. What if a client wants to start their claim at 64? At 65? Use the tools on SSA.gov or your own choice of Social Security tools to run date-specific estimates.
2. WEP/GPO – Millions of state workers are not eligible for full Social Security or spousal benefits. You’ll need to properly calculate a client’s reduced benefits based on the Windfall Elimination Provision (WEP) or their spousal or survivor benefits based on the Government Pension Offset (GPO). The reductions can be significant. In the case of GPO, $0 spousal and survivor Social Security income is common.
3. Earnings Test – Clients who continue to work and claim Social Security before reaching FRA, face a limit on earnings—$1,420 per month in 2018. You’ll want to work with clients to determine the claw back in payments, and then plan for increased amounts once they reach FRA.
4. Taxes – Most clients’ benefit will be subject to income tax. There is a special process to figure out the taxable amount. Use IRS Publication 915 and the worksheets to estimate tax liability. This step needs to be repeated every year in retirement.
5. Medicare Part B – Clients are often shocked to learn Medicare Part B premiums ($134/month to $428/month in 2018) will automatically be deducted from their Social Security payments. At a minimum, you’ll want to decrease a client’s Social Security benefit for this mandatory reduction in their retirement income plan.
“So, Can I Stop Working Now?”
This question will pop up from many clients after your discussions about retirement plans and Social Security income. No surprise; the answer is “maybe.”
Whether a client can stop working becomes more about what they will be moving toward and how they want to spend their days. Only then can you both assess the viability and sustainability of their comprehensive retirement income plan.
Remember that any one year of earnings represents 1/35th of the benefits calculation. As a result, quitting work or staying on the job for one additional year isn’t going to move the needle much.
…and One Last Thing
Many times clients will find a mistake on their own Social Security statement. Sometimes it’s a misspelling of their name or their date of birth is wrong. Wage information could be missing or incorrect and may have been for years.
While it’s your client’s responsibility to fix their record, it shows your knowledge and concern if you can direct them to the SSA for corrections. Clients have a limited amount of time to correct earnings errors:
3 years 3 months and 15 days
If you haven’t already incorporated a thorough review of clients’ Social Security statements into your planning meetings, it’s a good time to start. Understanding the benefits, applying reductions, and considering calculation parameters, claiming strategies, and timing are all important when helping clients make two major decisions: when to retire vs. when to claim.◊