Why your financial advisor may not give you the best Social Security claiming advice

Many people claim Social Security retirement benefits at the earliest possible claiming age of 62.

But that decision prompts their monthly benefits to be reduced for the rest of their lives.

Working with a financial advisor should help encourage prospective beneficiaries to understand the value of delaying their benefit claims. Yet recent research finds working with a financial professional does not necessarily encourage individuals to claim Social Security at later ages.

The research — co-authored by David Blanchett, head of retirement research for PGIM DC Solutions, and Jason Fichtner, chief economist at the Bipartisan Policy Center — found the results varied based on advisor type. Higher wealth households tend to claim benefits two years later when working with financial professionals who are paid hourly, such as accountants, compared to households that work with commission-based advisors, or brokers.

Affluent households that work with any type of financial professional, particularly brokers, tend to claim Social Security earlier than those that do not, the research found.

The research concluded that delayed Social Security claiming may not be beneficial for advisors because it reduces client assets they can manage and may make retirement planning less complex.

“This research shows that financial advisors may be biased toward strategies that may provide higher advisor compensation, even if those recommendations are not in the best interests of their clients,” Blanchett and Fichtner wrote.

The research results are “really disappointing,” said Joe Elsasser, a certified financial planner who is president of Covisum, a Social Security-claiming software company.

“I would have at least liked to see a general later [claiming age] trend across all advisors,” Elsasser said.

When Social Security retirement beneficiaries claim at age 62, their benefits are permanently reduced.

If they wait until their full Social Security claiming age — which is generally between 66 and 67, depending on their year of birth — they may receive 100% of the benefits they’ve earned.

As the Social Security full retirement age moves to age 67, benefits available at age 62 are even further reduced.

By waiting until age 70, retirees stand to receive the biggest benefit boost — a monthly benefit that is 77% higher than what beneficiaries may receive at 62, the research notes.

But delaying until that highest claiming age requires beneficiaries to have other income on which they can rely in the interim. “Delayed claiming isn’t a free lunch,” the research states.

That may mean working longer or bridging to a higher claiming age by turning first to other investments.

Delaying Social Security benefits is so valuable not only because of the increase to benefits, but also the annual cost-of-living adjustments tied to inflation. No annuities on the market provide the same inflation links, the research notes.

To be sure, not everyone can wait to claim until age 70. Those who do delay tend to retire later or have more financial assets, according to the research.

“A lot of Americans don’t have an active choice on when to claim,” Blanchett said.

“If you know that you’re not sick, and you have some money saved for retirement, the odds are you should probably at least delay until 65, 67, maybe 70,” he said.

Not all financial advisors will have the same knowledge of the ins and outs of Social Security claiming, which comes with a multitude of rules.

Experts say there are signs prospective claimants can watch for to gauge the quality of the guidance they’re getting.

“If a consumer ever gets either a recommendation or an acceptance of an early claim, they’ve got to really evaluate … ‘Why is this advisor giving me that advice?'” Elsasser said.

Try to evaluate your financial professional’s process that led them to that conclusion, he said. Often, it’s a result of longevity assumptions that are too short, or the idea that Social Security benefit income that is claimed early can be invested.

Consumers can gauge longevity estimates using a free online tool, the Actuaries Longevity Illustrator, Elsasser said. Moreover, investment returns that are compared to Social Security should be based on more conservative holdings like government bonds rather than stocks, he said.

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Written materials provided by the Social Security Administration make it clear that evaluating when to claim is a personal decision, notes Fichtner, who formerly served as acting deputy commissioner at the agency.

A financial professional should also guide you through those same considerations — What is your health status? What other sources of income do you have? How will your claiming decision affect your spouse, if you have one?

Most prospective Social Security claimants are trying to make their money last, rather than maximize their returns, Fichtner said.

Consequently, a financial advisor’s recommendations — whether done independently or through a software — should emphasize protecting lifetime income rather than boosting returns, he said.

Surveys routinely show one of the top reasons Social Security beneficiaries claim early is because they are concerned about the program’s future. The program’s trust funds may run out within the next decade, at which point there may be an across-the-board benefit cut unless Congress acts sooner.

But experts say that’s not a reason to claim early. By delaying, any future prospective cuts would be applied to a higher benefit amount.

Even shorter-term claiming delays of months rather than years can help increase your lifetime income.

“Every month you delay, it’s a benefit increase,” Fichtner said.