Page 33 - Investment Advisor March 2021

Claiming early can be
particularly harmful for Social Security Basics

a higher earner because There are a few online resources to help clients understand
what the best claiming strategy may be for them, such as
it reduces income for both maximizemysocialsecurity.com.
spouses over a lifetime, and

harmful for a lower-earning
spouse because he or she

forgoes the ability to receive

the full 50% spousal benefit.
Plus, the Social Security
The market values $1 of inflation-protected income 20 or 30 Administration has an informa-
years in the future higher than $1 today. tive pamphlet that discusses
Advisors who believe that investors are placing too high a the important factors that
price on future real income are free to bet against the market everyone should consider
by trading inflation swaps, but clients should use a discount when thinking about
rate based on current pricing. what age to claim
By delaying claiming from age 69 to age 70, the healthy Social Security retire-
client may forego $30,000 in income for one year in order to ment benefits.
receive an additional $2,400 in annual income for life starting This includes issues
at age 70. What is the value of this income? Simply multiply such as clients’ health,
the survival probability by the present value of the payment. other retirement assets,
The value of a monthly payment during the 75th year of whether they are married, and
age for a male is about $2,250. It’s about $1,500 for his 85th whether they want to continue working
year and $470 for his 95th year. In total, the present value is in retirement. See: www.ssa.gov/pubs/EN-05-10147.pdf
$44,700, or nearly 50% higher than the income he gave up.
For a female, the present value is $48,500, or 62% higher.
Put another way, the healthy female client can gain $18,500 in If couples have similar incomes, delayed claiming should be
expected retirement wealth by simply waiting a year to claim. based on a present valuation calculation. If they are healthy,
both should likely delay to 70, although the calculation is made
Women vs. Men more complex by the surviving spouse’s ability to claim the
The previous example also illustrates an important point — other spouse’s full benefit after death. If a spouse is unhealthy,
Social Security income is more valuable for women than it is it may make sense to claim earlier.
for men. Why? Women live longer. A lower-income spouse has the option to receive half of
On average, they can expect slightly more than two years the benefit of a higher-earning spouse when he or she claims
of additional payments in retirement. Women benefit more their benefit at full retirement age. This increases the pres-
from delayed claiming and, conversely, suffer a greater loss in ent value benefit of delayed claiming for a higher-income
wealth from claiming early. worker, especially if the lower-income spouse is expected to
Many of the more advanced claiming strategies were elimi- live longer.
nated in 2016 to limit opportunistic behaviors that impacted Claiming early can be particularly harmful for a higher
the solvency of Social Security. However, differences in spou- earner because it reduces income for both spouses over a life-
sal incomes still present an important opportunity to increase time, and harmful for a lower-earning spouse because he or
expected lifetime income for lower-earning spouses. The ben- she forgoes the ability to receive the full 50% spousal benefit.
efit is even greater for lower-earning women who can expect Upon the death of the higher-earning spouse, the surviving
to receive more in future benefits. spouse can receive the other spouse’s full benefit amount.

MARCH 2021 INVESTMENT ADVISOR 31