Remember that the income increases calculated by SocialSecurity are fair for an American of average lifespan andduring a period with positive real interest rates. For healthyAmericans today, delayed claiming provides an (actuarially)increase in total wealth.
While benefits are available as early as age 62, claiminglater permanently raises monthly benefits with the maximumbenefits available to those who claim at age 70. There’s a 6%reduction in monthly benefits for each year one begins receiving benefits before full retirement age.
For someone whose full retirement age is 67 but decides tobegin benefits at 62, that means approximately 30% less permonth than if waiting until age 67.
If your client is able to wait, delaying claiming past the fullretirement age means they will gain about 8% more in monthlybenefits each year, up to age 70. For someone with a full retirement age of 67, delaying Social Security retirement benefitsuntil age 70 would result in a 24% increase in the monthlybenefit amount.
Here’s another way to think about the financial impact ofearly claiming. Assume the initial monthly benefit is $1,000 if aclient claims benefits at the full retirement age of 67. If the client begins collecting benefits at 62, the monthly benefit wouldbe $700 — that’s a 30% reduction.
But if the client can wait to begin collecting benefits untilage 70, the monthly benefit would be about $1,240 — 24%
more than the $1,000 he client would get at age 67, and 72%higher than the monthly benefit amount the client would havecollected if you began at age 62.
Only about 4% of retirees make the optimal Social Securityclaiming decision. This results in a loss of wealth of roughly$2.1 trillion for current retirees that made a suboptimalclaiming decision.
Additional United Income estimates demonstrate thatfuture retirees could lose an estimated $3.4 trillion in potentialincome that could be spent in retirement due to suboptimalclaiming decisions.
Optimal Claiming
Many advisors have become accustomed to using a breakeven calculation to evaluate claiming strategies. This generallyinvolves telling a client the age at which increased paymentsfrom waiting a couple of years will eclipse the paymentsreceived by claiming early. This method may cause a client todismiss delayed claiming as a gamble that they’ll be alive atthat age to benefit from the strategy.
Other advisors may discount future payments using theexpected historical rate of return on portfolio assets. Thiswould result in placing significantly less value on paymentsoccurring 25 or 30 years in the future.
Social Security income payments are far more valuable thana hypothetical risky return that is not adjusted for inflation.
the CPI exceeds the previous highest level. This is why therewas no COLA increase in 2010, 2011, and 2016.
Planning for Future Retirement Expenses
One of the most difficult aspects of planning for expenses in retirement is estimating the cost of health care over an uncertain lifespan.
Over the past two decades, the Medical Care Services category ofthe CPI experienced one of the highest increases in price inflation.
As retirees live longer, financial advisors will need to helppeople plan for the high costs of assisted living facilities. Themedian cost of assisted living care was $51,600 a year in 2020,while the median cost for a private room in a nursing home was$105,850, according to the Genworth Cost of Care Survey.
While the Social Security COLA is based on the CPI-W, whichitself is based on eight major categories of spending, it is not aperfect measure of everyone’s cost of living.
Budget shares for housing, energy and food may be higherfor retirees in certain regions, while the cost of health care riseswith age. Younger and wealthier retirees may spend more onleisure and travel.
Financial advisors need to recognize that changes in SocialSecurity likely will not match changes in their clients’ expenses, making the inflation protection an imperfect hedge against price volatility.
Social Security COLAs are designed to increase purchasingpower enough to keep Americans out of poverty. Managinginflation for a wealthy retiree requires different strategies thatmay involve the use of insurance to protect against health costrisks and investments that historically outpace price increases.
According to the Social Security Trustees, the combinedOld-Age and Survivors Insurance (OASI) and DisabilityInsurance (DI) trust funds face a financial shortfall of $16.8trillion in present value through 2094 and $53.0 trillion overan infinite horizon.
Further, the Social Security trust funds will be depleted andunable to finance full benefits in 2035.
Unless Congress takes action to reform Social Security, theprogram will only be able to pay approximately 75% of estimated benefits when the OASI trust fund runs out of assets in 2035.
The Medicare program also faces a funding shortfall, with themost recent estimates suggesting that the hospital insurancetrust fund could be depleted in 2026.
Financial advisors will need to help clients navigate the uncertainty and risk associated with the impact that the impendingdepletion of the Social Security trust funds will have on SocialSecurity retirement benefits, Medicare premiums and retirement security. —Jason Fichtner and Michael Finke
