Prevailing logic is
that citizens should wait as long as possible to collect Social Security so
their payments will be higher, say BlackRock experts, but there are special
circumstances when a recipient can benefit by collecting
early.
Those who opt to
collect Social Security at age 62 will reduce their benefits by 20 percent to 30
percent, depending on their normal retirement age, which could amount to
hundreds of thousands of dollars in lifetime payouts, says Chad Terry, director
of Investment and Retirement Education for BlackRock Inc., the world’s largest
asset manager.
But in some
instances, collecting benefits early actually makes financial sense: For
instance, the lower earner in a married couple may want to collect as soon as
possible while the higher earner waits as long as
possible.
“It’s the way
survivor benefits work,” says Ron Kron, director of BlackRock’s advisor
education group. “When the higher earner passes away, the lower earner has in
essence the ability to inherit the higher earner’s benefit, making their own
benefit no longer relevant. The sooner the lower earner starts collecting, says
Kron, the better off they’re going to be. Because at some point, that benefit is
going to stop being relevant and they’re going to switch over to that higher
survivor benefit.”
Kron says potential
Social Security recipients can benefit if they have dependent children living at
home. As soon as those recipients begin to collect Social Security, their
children become eligible. “It’s a benefit that not everyone is aware of and that
could influence someone’s decision regarding collecting early.”
Spousal benefits are
especially vital for women, say experts. They are more likely to take time out
of the workforce and tend to have lower career-long earnings, which consequently
cuts their Social Security benefit levels.
And since women tend
to live longer and outlive their spouses, they often collect survivor benefits
based on their husbands’ benefit levels, says Kron. Women tend to be more
dependent on Social Security, particularly at advanced ages, and thus the age at
which their spouses collect Social Security significantly affects their own
retirement income.
Financial advisors,
says Kron, should also talk to their senior clients who are survivors or widows
about taking the government’s survivor benefit as early as possible starting at
age 60 while letting their own benefit continue to grow, and then switch over to
that higher benefit at age 70.
Contributing to
citizen confusion about Social Security is the dearth of available information
on what to do when that eligibility day arrives. “When we all bought Social
Security, we really had no idea of what we had started to buy,” Kron said. “When
you get to age 62, you’re really not any more informed than you were that day
that first deduction was taken out of your paycheck.”
Another prevalent
Social Security misconception: It kicks in automatically for all recipients.
“Nobody gets a letter in the mail saying, ‘We have a whole lot of money here
that we can start sending to you,”’ Kron said. “The lack of awareness around how
dependent this benefit is on your action is also a big
problem.”
Kron recommends that
people approaching age 62 consult a financial advisor. Not only is when to take
benefits a complex decision, but the right choice for a client often has a lot
to do with the other assets he or she has, the taxability of those other assets
and ultimately what income streams they want to generate in
retirement.
“This boomer
generation is facing increased longevity relative to their parents,” Kron said.
“So with this increased retirement period you need to think a lot longer and
more thoroughly about what income plan you are going to put in place, so what
role is Social Security going to play in that?”
Given that many in
the first wave of baby boomers are already collecting their Social Security
benefits and there are legions behind them to come, there’s an ever increasing
pool of recipients who are ready to begin collecting their benefits. “Suddenly
you have this huge influx of new recipients calling up, unaware of their
options, maybe many hearing theses rules of thumb of taking their benefits as
soon as possible,” Kron said.
—Jim McConville for Financial Advisor Magazine
