3 reasons clients should take Social Security early

If I asked someone whether they would rather have $100 guaranteed today or $120 non-guaranteed tomorrow, what would their response be? Most likely the former, because guaranteed money is better than non-guaranteed. This is the basic principle behind my stance on taking Social Security as soon as you retire.

Especially now, the fate of Social Security is in jeopardy. President Donald Trump recently issued an executive order to defer payroll taxes for the rest of this year and, possibly, indefinitely. This adds yet another hurdle to the already challenging task of timing clients’ Social Security benefits.

It’s important to point out that taking Social Security as early as possible is not the best approach in all situations. Social Security-claiming age starts at age 62; however, if your client is between ages 62 and 67 and they are still working, taking the benefit could be harmful for two reasons.

First, they would be penalized, and benefits could be retracted depending on earned income. Second, they could be missing out on the growth of their Social Security as benefits grow at 8% each year that they are deferred.

Conversely, if your clients are retired or are planning to retire soon, it could make sense to turn the Social Security spigot on early for the following reasons:

1. Uncertainty around mortality

We don’t have a crystal ball. No advisor, regardless of experience, knows what a client’s life span will be. One of the first things I discuss with my clients is their general health situation and history. While this can help provide a better picture of someone’s longevity, it offers no certainty.

If your client decides to forgo taking Social Security early in retirement (say age 62) and passes away at age 67, five years of potential benefits have been missed. Unfortunately, Social Security does not pay out deferred benefits to beneficiaries, only a death benefit of $255.

2. Social Security Trust Fund insolvency

Social Security is financed primarily through payroll taxes, with a small portion funded by interest earned in the Old-Age and Survivors Insurance (OASI) Trust Fund. Furthermore, the trust fund is projected to be exhausted by 2035.

In 2019, payroll taxes going toward Social Security funded approximately 89% of payments to program recipients.  With the long-term stability of this tax called into question in recent weeks, the future funding of Social Security has alarming concerns. To make things even worse, there’s no current game plan for what will happen once the OASI trust fund is depleted.

In the near term, the elimination of the payroll tax could create more stability for personal finances by helping people stay afloat with day-to-day bills through the COVID-19 pandemic.

Furthermore, it is designed to help stimulate the economy by providing working Americans with additional funds to spend on consumer discretionary items. However, I believe it will be challenging to sustain the Social Security system without this tax over the long term.

Though we would never recommend a retirement plan that relies primarily on Social Security income, the truth is even those people who depend on it for a small amount of income would still be negatively affected if it were to disappear.

3. Take advantage of guaranteed income while it’s available

There’s no such thing as a free lunch, but taking advantage of Social Security benefits (when it makes sense) is about as close as your clients can get. Furthermore, tapping Social Security will likely prevent them from selling amid market declines. If your clients’ accounts are down in a bear market, the last thing they should do is sell depressed equity positions.

There are both qualitative and quantitative aspects of retirement planning. The qualitative aspects, including mortality, health and lifestyle changes, are all unknowns. But the quantitative piece is where we can add value to a client’s plan in retirement.

Social Security is normally one of the most important pieces in retirement planning, and if these benefits are in an unnerving position, it is best to start taking it early.

At the end of the day, clients need to feel comfortable with their decision about when to start taking Social Security. As an advisor, it is my job to continuously and proactively check in and provide the pros and cons of all retirement circumstances.

Tony Zabiegala, CRPC, is a founding member of Strategic Wealth Partners with 15 years of experience in financial services. As VP and COO, he provides wealth management solutions and customized retirement plans to high-net-worth families. Strategic Wealth Partners is an RIA headquartered in Independence, Ohio.