The decision to take or delay receiving Social Security payments can be one of the most difficult quandaries that retirees face, and the right answer isn’t always the one that results in the most immediate happiness.
Financial planning blogger Dirk Cotton explores this issue in a recent post on his blog The Retirement Cafe, concluding that sometimes what’s “best” for a client — typically delaying Social Security benefits as long as possible — might be cold comfort.
Of course, the common retirement wisdom dictates that smart planners delay taking Social Security benefits as long as possible to secure the highest possible benefit amounts. But that strategy doesn’t match reality for many Americans, especially with the gradual disappearance of defined benefit pensions, and for some, the peace of mind outweighs the financial loss.
And in Cotton’s experience, it isn’t just immediate need that drives some retirees to claim Social Security as quickly as possible — it’s also a fear that the benefits will disappear due to fiscal issues in Washington and the explosive growth in beneficiaries as the baby boomer generation ages, though Cotton says that’s unlikely to happen anytime soon. (For the record, the Social Security Administration claimed last year that the program is funded through 2034, then “three-quakers” fined thereafter.)
“If I recommend to a client that she delay claiming her Social Security benefits, and she lies awake at night worried that the Social Security program will be shut down before she receives any benefits, then I have not created a happy client,” Cotton writes.
“Though I will do my best to explain the advantages of delaying, if delaying is going to make her unhappy, then claiming early is the ‘best’ strategy,” he continues.
He also discusses consumer skepticism of annuities, a type of product that has a similarly checkered reputation in the minds of the general public as the Home Equity Conversion Mortgage.
“Purchasing a fixed annuity might be a no-brianer for an economist or a financial planner, but if it doesn’t make the client happy, it isn’t the right strategy,” Cotton writes, saying that many folks are simply wary of handing over large chunks of their savings to insurance companies in exchange for fixed annuities.
Cotton’s comments come amid a larger discussion of a financial planner’s duty to his or her clients: Who gets to define what’s “best” for a client? Is it simply based on financial outcomes, or should a customer’s happiness and peace of mind play a role in developing a retirement plan? And how does one balance those outcomes to reach an amenable middle ground?
“’Best’ may mean to us the plan that survives the most simulations, the plan that eliminates worst-case scenarios, or the plan that uses retirement resources most efficiently, for example,” Cotton writes. “Those are all pretty good standards, but they don’t measure happiness.”
Read Cotton’s full post here.
Written by Alex Spanko