Clients who are retiring most likely are holding on to a high-yielding fixed-income asset that's waiting for the right time to be deployed.
It's called Social Security.
Indeed, if the right strategies are deployed — and in particular, nailing the best time to start collecting benefits — the inflation-protected stream of income could be better than owning a certificate of deposit that's earning 10%, according to Mary Beth Franklin, contributing editor at InvestmentNews and speaker at the Retirement Income Summit in Chicago on Tuesday.
“Treat clients' Social Security-claiming decision as seriously as any other part of their investment portfolio,” she said, dubbing Social Security a new asset class. “It's not just advisers like you who are aware of this — increasingly, consumers understand how serious the [claiming decision] is.”
Timing the benefits claim has become even more important lately, as legions of boomers are retiring and hitting the key age of 66, which is the full retirement age for anyone born between 1943 and 1955. Retirees who reach that age but wait until 70 to take their benefits receive an annual 8% retirement credit while they defer.
The price can be steep for taking Social Security too soon: Accepting the payments at 62 could trim retirement benefits by 25% for the rest of a client's life.
Further, clients below 66 are subject to an annual earnings cap of $14,649 this year if they collect benefits and continue earning income from a job. This means they lose a dollar in benefits for every two dollars earned over that limit, Ms. Franklin explained.
For those who turn 66 this year, the limit becomes more generous: You lose $1 in benefits for every $3 earned over a limit of $38,880. Starting in the month that an individual turns 66, these limits no longer apply, so claimants can continue working without losing their benefits.
“Sixty-six is the magic age,” Ms. Franklin said. “You can collect your benefits without reductions even if you keep working, and you can execute creative claiming strategies.”
For instance, with “power couples” — dual-income marriages — one spouse can claim Social Security, while the other restricts his or her own claim at 66 to collect spousal benefits only. The 66-year-old spouse receiving spousal benefits can defer making claims on his or her own Social Security income stream until 70, which allows the benefit to grow in the meantime, Ms. Franklin said.
The tactic is different for couples in which one spouse is the primary breadwinner. In that case, it may make better sense for that individual to “file and suspend” at 66. This allows the breadwinner's spouse to begin collecting payments but suspends the primary earner's benefit until 70 to ensure that person collects the maximum amount available, Ms. Franklin said.
But advisers need to watch out. “You can't use these strategies if you collect benefits before age 66,” she added. Still, there are do-over strategies that allow beneficiaries to suspend their payments within 12 months of first claiming them, paying back what they received and restart the benefits at a later date.
Ms. Franklin also pointed out that Social Security retirement benefits and survivor benefits are two separate pots of money, and the latter has its own set of strategies.
For instance, beneficiaries can collect on an ex-spouse's survivor benefits, even if that individual has remarried. Similarly, provided that a couple was married for at least a decade and has been divorced for at least two years, a claimant who hasn't remarried may be able to collect benefits based on his or her significant other's work history, Ms. Franklin explained.
Widows and widowers also can collect survivor benefits as early as 60 and defer collecting on their own benefits until 70, taking advantage of that 8% retirement credit for each year they wait to take their benefits after 66.
“Timing is everything," said Ms. Franklin. "Knowing when and how to claim benefits can boost retirement income by tens of thousands of dollars over a client's lifetime.”