When Should Clients Claim Social Security? 8 Things to Consider

2. Short-Term Financial Needs

This is a question that generally pertains to those clients in the early years of Social Security eligibility. Assuming that they have other sources of income to meet their needs, it can often make sense to wait to claim until the client reaches their full retirement age — or even until age 70 when they can maximize their benefit.

In some cases, the client may be under their full retirement age and not working. Claiming their Social Security earlier can allow this money to be used to cover expenses such as health insurance, especially if they are not yet eligible for Medicare. Are there other expenses that money could be used for? An analysis of whether it makes sense to tap other sources of retirement income or to wait on those other sources and claim Social Security can help you and the client chart the best course.

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3. Employment Status

If your client has not yet reached their full retirement age and is employed or self-employed, any earnings over the earning limit will significantly reduce their Social Security benefit. For 2023, this reduction is $1 for every $2 of earned income over the limit of $21,240. In the year they reach their full retirement age, the limit increases to $56,520, with a benefit reduction of $1 for every $3 of earned income above this threshold. There are no earnings limits once they have reached their full retirement age.

If your client is working and their earned income exceeds these limits, it makes sense for them to wait to claim their benefits until they reach their full retirement age at 66 and a few months up to age 67 for those born in 1960 or later. While any benefits that are reduced will be received once they attain their full retirement age, it generally makes sense just to wait in this situation.

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4. Break-Even Analysis

A break-even analysis looks at the lifetime financial impact of claiming Social Security at various ages. For example, if your client is considering taking their benefit at age 64, a break-even analysis can illustrate the difference over time between claiming their benefit at 64 and waiting.

The analysis will show how long they need to live until claiming at a later age yields a higher cumulative lifetime benefit. This analysis can then be used as a basis to factor in other considerations in the claiming decision, such as your client’s health and potential longevity.

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5. Health and Longevity

While nobody can predict how long they will live, clients with health issues or a family history of decreased longevity might be inclined to claim Social Security earlier rather than later. You can help quantify the effect of this decision for your client by doing a break-even analysis illustrating the lifetime impact of claiming their benefit at various ages. This can help illustrate several options for the client which can be factored against any health or related concerns they may have.

For married couples, the health of the spouse should also be considered. In some cases, it makes sense for one spouse to claim their benefits early. This might be appropriate if that spouse is in poor health with a shorter life expectancy or as a way to balance out the other spouse waiting until later to claim.

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6. Marital Status

When working with clients who are married, it's important to consider each spouse’s benefits, as well as the effect of the claiming decision on survivor’s benefits. There can be a number of factors at play here.

First, if there is a significant difference in benefit levels between the two spouses, it often makes sense to have the spouse with the higher benefit delay taking their benefit, perhaps to age 70. This will ensure the largest survivor’s benefit for the spouse with the lower benefit.

This assumes that the spouses are relatively close in age; if there is a wide age gap this may not be as applicable. Note also, if the higher-earning spouse dies before claiming their benefit, it could affect the amount of the survivor’s benefit.

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7. Tax Planning

What does the client’s tax situation look like now versus in the future? The threshold for triggering tax liability on their Social Security benefits is fairly low. If your client is in a relatively high tax bracket early on in retirement, it can make sense to wait to claim their benefits. This of course will depend on looking at other factors mentioned here.

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8. Return on Investment

One of the alternatives to claiming their Social Security is tapping into investments. This is essentially a return-on-investment question. Is it better to leave their money invested and claim Social Security earlier than they may have planned, or wait and let their Social Security benefit grow?

The ROI from deferring Social Security benefits should also be considered. The difference between claiming at their full retirement age and waiting until age 70 to claim their benefits results in an 8% annual increase in their benefits. This equates to a 24% gain for those whose full retirement age is 67, and doesn’t take any Social Security cost-of-living adjustments into account. The difference between claiming at age 62 or waiting is also quite significant.

One option that can make sense is claiming their benefit and investing some of all of the money into their portfolio to allow for continued investment growth until the money is needed. Clients considering this path will need your expertise to analyze the pros and cons.

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