At a recent AICPA conference, three CPA tax practitioners, including the author, engaged in a conversation about client services, noting in particular that all were fielding more questions from clients about timing strategies for claiming Social Security retirement benefits. Two of the CPAs heartily offered that they always advise clients to begin claiming benefits as early as possible--age 62.
Their responses were surprising for two reasons. First, the word "always" rarely applies when discussing Social Security benefits. Second, it is less common that an analysis would support beginning benefits at age 62, except when there is only one record to consider. Interestingly, when the author mentioned this conversation to another CPA, that CPA quickly commented that those CPAs were mistaken, stating that she always tells her clients to delay claiming until age 70 to maximize their benefits.
There was that word again: always. When advisers do not know the answer to a complex question, they are tempted to generalize. However, in the case of Social Security, the strategy that seems best on the surface is often found to not be the optimal strategy after pulling back the covers and considering the individual's unique circumstances.
The confidence with which these CPAs offered their advice of when to claim Social Security raised the question of how other CPAs advise clients when they are asked the same question. While many CPAs have conflicting views on Social Security, it seems that all are very interested in considering the topic further to help clients answer two looming questions: When can I retire? Will I have enough money to retire?
It seems that defined benefit pensions are a thing of the past for most clients. Other retirement plans, such as a 401(k), have worked for some, but they have come up short for others, who, on the precipice of retiring, regret not having saved more. Clients wonder, either consciously or subconsciously, whether they will outlive their assets, given unknown health care costs, inflation, and stock market volatility.
Of course, clients want to maximize every potential source of income. Social Security is usually the most straightforward piece of the retirement income puzzle to estimate. Benefits are paid under a legal formula. Payments do not rise and fall with the markets or depend on company performance, though whether Social Security actually keeps up with inflation is another matter to take into account.
Even so, Social Security is a great foundational place to start retirement planning. While Social Security was never intended to provide full support in retirement, this inflation-protected income stream, which could pay out over $1 million over an individual's lifetime, can help.
Below are the top seven mistakes clients make when claiming Social Security benefits and ways to help prevent them:
Relying on general information
Most clients learn what they know about Social Security from the periodicals they read, friends and family, and the Social Security Administration. This generic information could mislead clients into making decisions that would not be most favorable for their unique situation. Even with the best intentions, sometimes clients just "don't know what they don't know. "This is especially important with a nuanced topic like Social Security. Wherever clients receive their information about Social...