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workers don’t gain from waiting to collect their retirement warn, the results may overstate the gains from Social Security
benefits, for example due to lower longevity or their unique optimization, given their maintained assumption that workers
work history. Such workers may lose benefits from other take their Social Security benefits as soon as they retire.
transfer programs and face higher lifetime taxes, with the The bottom line, according to Altig, Kotlikoff and Ye, is
present value net tax increase exceeding the gain in lifetime that Social Security lifetime benefit optimization represents
Social Security benefits. a clear means of improving the welfare of retirees. High-
Ultimately, the precise gains and cash-flow constraints that income retirees have the most to gain in absolute terms from
will dictate a real-world worker’s optimal choices are highly maximizing their lifetime benefits, the paper explains, but
dependent on household characteristics. Hence, no single low-income retirees can raise their living standards by a far
claiming strategy fits all, the authors conclude. Moreover, they higher percentage.

Making the right claiming decision is complicated,
but advisors now have more ways to help.

Michael Finke, a professor and the Frank M. Engle chair of “Advisors can explain that, by withdrawing the IRA assets
Economic Security Research at The American College of when their income taxes are lower, this allows for a reduction
Financial Services, says many advisors have become accus- in the tax impact of required minimum distributions later in
tomed to using a break-even calculation to evaluate Social life,” Finke explains. “They can withdraw more before age 70
Security claiming strategies. This generally involves running and less after Social Security begins, while paying attention to
some fairly basic calculations that show a client the age at tax brackets.”
which increased payments from delayed claiming will eclipse More sophisticated claiming analyses strive to take into
the payments received by claiming early. account the tradeoff of receiving no income during the defer-
In Finke’s experience, this method works well among cli- ral period and more income later in retirement, often using
ents who are mathematically inclined or who are comfortable a concept known as “present value,” he adds. Such analy-
taking on some well-compensated “mortality risk” by waiting ses show the losses of early claiming are particularly acute
longer to claim. On the other hand, this method may cause
other clients to dismiss delayed claiming strategies as a gamble
that they will be alive at that age to benefit from the strategy.
Those clients with chronic health issues or the least faith in
the solvency of Social Security may be the hardest to convince,
even in cases where delaying could greatly benefit a healthier
or younger spouse.
Many retirees suffer from a behavioral phenomenon
known as narrow framing, Finke says. In essence, they
aren’t easily able to disentangle the decision to claim
Social Security from the decision to retire. Many also
express discomfort at the prospect of spending down
their hard-earned liquid savings in order to fund
early retirement expenses before Social Security
kicks in.
One way to encourage clients to accept Social
Security deferral is to focus their emotions on some-
thing they may dislike more than spending down
savings — i.e., paying higher income taxes on future
required minimum distributions. He urges advisors
to estimate a sustainable annual retirement spending
path given the client’s current wealth and make a plan
to withdraw funds from a traditional individual retire-
ment account or 401(k)-style workplace plan to bridge
lifestyle expenses before Social Security begins.

FEBRUARY/MARCH 2023 INVESTMENT ADVISOR 23