Guest: Mary Beth Franklin, a longtime Washington, DC-based journalist, Certified Financial Planner (CFP®) and one of the country’s leading experts on Social Security, Medicare, and retirement income planning.
In a nutshell: Deciding when to claim Social Security benefits is one of the most critical retirement decisions a senior will make.
It’s also one of the most emotional retirement decisions that a financial advisor can coach a client through. Advisors have to be prepared to have more holistic conversations about where Social Security fits into a Life-Centered Financial Plan.
On today’s episode, Mary Beth Franklin and I discuss how fear about Social Security’s future is causing some seniors to claim their benefits too early and the challenges advisors face when coordinating multiple retirement benefits and income streams into a dependable plan for the future.
.Mary Beth Franklin and I discuss:
- A brief history of how the federal government and the Federal Reserve have handled the Social Security Trust Fund’s solvency challenges.
- How to talk to clients who are worried that Social Security is “going bankrupt” and want to claim their benefits ASAP.
- Planning ahead to avoid IRMAA surcharges, Roth conversion cliffs, and other potential tax surprises for high-net-worth clients.
- Maximizing lifetime Social Security benefits for married couples and the single biggest mistake advisors make regarding survivor benefits.
- What public sector clients, and their advisors, need to know about the Social Security Fairness Act and retroactive benefits.
Mary Beth Franklin on the danger of letting fear drive Social Security decisions:
“I think the fear of Social Security running out of money is causing a lot of people to claim benefits sooner than they should. Even though I was a Capitol Hill reporter for 10 years and, once upon a time, was fairly confident that I knew what Congress was going to do next, I do not have a clue. The current administration and the current Congress have just rewritten all the rules, and I would be lying if I told you what’s going to happen. But I also think we get enough notice in most cases that if things are going to change, you can adapt as needed. Right now, I think we can only operate in an environment based on current laws. And the current law tells me I can claim Social Security benefits as early as age 62, compared to maybe my full retirement age of 67. But if I do, I know I’m taking a 30% cut right off the top for the rest of my life. And let’s say your worst-case scenario happens, and the Trust Funds run dry, and Congress has to cut everybody’s benefits by 20%. That’s on top of the 30% you already took. How’s that working out for you?
“If you need the money, certainly claim your Social Security benefits. That’s what it’s there for. If you don’t have longevity in your family, you probably don’t want to wait. If you’re ill, take it. But if you’re taking it early just out of fear, to me, that is like cashing out your stock portfolio in a down market. The only thing you have guaranteed is you just locked in a loss.”
Mary Beth Franklin on coordinating spousal claims and the biggest mistake advisors make:
“You probably don’t both need to wait till age 70. Let’s have the spouse with the bigger benefit, who tends to be the husband, who tends to have been the bigger breadwinner, who tends to be a few years older, let’s have him wait until age 70 to get the biggest retirement benefit possible while both spouses are still alive. And guess what? He’s probably going to die first, and if he does, he’s now created the largest possible survivor benefit for his widow. Now, let’s say the wife was the smaller earner. She did work during her career, but probably didn’t earn as much as her husband. She has her own retirement benefit. She may want to go ahead and collect her retirement benefit early at 62 if she’s not working and subject to the earnings restriction. And yes, her retirement benefit is going to be reduced by up to 30% for the rest of her life. But guess what? It will have no impact on her survivor benefit if she is at least her full retirement age when she becomes widowed. So it’s a great way for married couples to basically take these break-even points we always hear about and stretch it over two lifetimes. It makes a lot of sense.
“Now, Social Security has more than 2,700 rules. I understand why people get confused. The biggest mistake I see advisors make is saying, ‘I have this widowed client. I told her to wait until age 70 to get the biggest survivor benefit possible.’ And I say, ‘No, no, no.’ Only a worker’s own retirement benefit continues to grow by 8% a year up until age 70. A survivor benefit is worth the maximum amount at the survivor’s full retirement age. So someone who tells their widowed client to wait till 70 to collect a survivor benefit just wasted four years of cash flow for that widow.”
Mary Beth Franklin on explaining to clients the ROI of delaying Social Security benefits:
“The greatest chart that I like to show clients and advisors is the difference between claiming your Social Security benefits as soon as possible at age 62 versus waiting till the latest age of 70. My full retirement is 67. That’s an extra three years at 8% a year. That’s a 24% increase in my benefits at age 70. That difference between claiming at 62 versus 70 increases my monthly Social Security benefit by 77% for the rest of my life. As a Certified Financial Planner, there is no investment I can recommend that is guaranteed to increase a monthly income by 77%. Yes, you’re investing eight years of your life in that decision, but it could make a huge difference in your retirement income plan.”
