I've just completed a whirlwind tour of speaking engagements to financial advisers around the country to help them understand the value of postponing Social Security benefits and exercising creative claiming strategies. I have talked with advisers in St. Louis, Denver, Cincinnati, Charlotte, N.C., Costa Mesa, Calif., and Minneapolis.
Audiences have been enthusiastic and questions have ranged from basic claiming rules to intricate case studies. But one comment always stops me cold: Should wealthier retirees grab Social Security benefits as soon as possible because the benefits might not be there in the future?
When I was in Minneapolis this week, one adviser told me a friend of his had claimed his Social Security benefits as soon as he was eligible at 62 even though he was still working and probably would forfeit all of his retirement benefits to the earnings cap. (His benefit will be recalculated at full retirement age to take into account those forfeited benefits).
By claiming benefits early, he was also guaranteed that he'd pay taxes on up to 85% of his Social Security benefits as his earnings and benefits would push his income above the maximum taxable threshold.
The reason? The man was sure that Social Security benefits would be means-tested in the future — in other words, reduced or eliminated for wealthier retirees — and he wanted to grab his benefits while he could.
The adviser asked my opinion of this smash-and-grab strategy. I responded — but in words I can't print here.
I understand that many people are concerned about the financial future of the Social Security system. I also understand that many of those who view the new mandatory health insurance laws, a.k.a. Obamacare, as the dawn of a socialized state also fear that the logical next step is to strip wealthier Americans of their earned retirement benefits.
But I don't agree.
The strength of Social Security's popular support lies in its near-universal participation.
The idea that workers who have paid taxes throughout their careers to fund Social Security no longer being able to access the retirement benefits they have earned would represent a monumental shift in the most successful and popular federal program in history.
Such a proposal would spark a lengthy and contentious debate. I guarantee, any eventual decision won't slip by unnoticed.
Plus, Congress seldom approves benefit changes that take effect retroactively. So you and your clients will have plenty of time to prepare and react to any change in Social Security rules.
In the meantime, why grab a reduced benefit at 62 that's worth only 75% of your full retirement age benefit if you can hold out longer for a much bigger benefit? As Americans live longer, having access to guaranteed retirement benefits for life will be more important than ever.
Remember, benefits increase by 8% per year for every year you postpone collecting them beyond your full retirement age up to 70. For someone whose full retirement age is 66, that means a 32% bump up in benefits at 70, creating a larger base for future cost-of-living adjustments.
And tell me, where else can you find an 8% risk-free return today? (Granted, it's not completely risk-free in that you take the chance that you might not live long enough to collect the bigger delayed benefit.)
I imagine that any eventual Social Security reform — which I don't expect anytime soon — may eliminate some of the existing claiming strategies for married couples that are the result of unintended consequences of the law. I think that's an even bigger reason to maximize Social Security benefits while the opportunities still exist.