Why the way advisors discuss Social Security can shape claiming decisions

Even with legislation intended to simplify Social Security language, financial advisors will still need to explain claiming choices clearly so clients understand the tradeoffs.

• Forward look: While the Claiming Age Clarity Act moves toward replacing terms such as "early eligibility age," "full retirement age," and "delayed retirement credit" with labels like "minimum," "standard," and "maximum" monthly benefit ages, advisors will still have to walk clients through the options.
• Expert quote: "A problem that advisors face is that the client already comes in with a preconceived idea that they're going to claim at age whatever-that-is, and you got to either say, 'Yes, that's a good idea,' or most of the time, 'No, that's probably too early. Have you thought about X, Y and Z?'" — Eric Ludwig, American College of Financial Services

The Claiming Age Clarity Act, H.R. 5284, has passed both chambers and is now awaiting the president's signature. The measure would rename the Social Security Administration's terminology so that age 62 becomes the "minimum monthly benefit age," the age now known as full retirement age would become the "standard monthly benefit age," and age 70 would be labeled the "maximum monthly benefit age" instead of being tied to delayed retirement credits.

Researchers at the American College of Financial Services say the terminology itself does not appear to change people's decisions. Instead, they argue that advisors should first learn what assumptions clients already have about Social Security and then use that as the starting point for guidance.

"A problem that advisors face is that the client already comes in with a preconceived idea that they're going to claim at age whatever-that-is, and you got to either say, 'Yes, that's a good idea,' or most of the time, 'No, that's probably too early. Have you thought about X, Y and Z?'" said Eric Ludwig, director of the Center for Retirement Income and an associate professor of retirement income at the American College of Financial Services.

Ludwig and Loren Flood, the college's director of curriculum and an assistant professor, found that claiming choices were shaped by which age thresholds people already recognized.

Their survey-based experiment included 1,603 respondents under age 60. Only 12.7% knew both the minimum and maximum claiming ages of 62 and 70, while 64.1% knew neither. More respondents knew about age 62, at 14.5%, than about age 70, at 8.7%.

When people only knew the earliest possible claiming age, they planned to claim 0.86 years sooner. When they only knew the latest age, they intended to wait 0.62 years longer.

"Advisors should identify the client's existing anchors before building the recommendation," Ludwig said in an email. "There also appears to be a basic misunderstanding that retirement age and Social Security claiming age have to be the same."

Different approaches to explanation

Some people may assume retirees claim early because they worry the trust fund will run out, but Ludwig said the study did not find that concern to be a statistically significant factor in claiming age.

Flood said those fears should be addressed with facts, including what any projected shortfall would and would not mean for benefits. He added that education works better than correction because it gives clients room to weigh the evidence themselves while also strengthening trust in the advisor relationship.

He also said it helps to show clients dollar amounts instead of relying only on percentages or ages.

The researchers also examined the break-even age, which reflects the point at which waiting to claim catches up with the larger monthly payments. Although that point often falls between ages 78 and 81, they advised against making break-even analysis the center of the conversation.

"The break-even-oriented messages did not produce later claiming intentions, while the age-based explanations did," Ludwig said. "Break-even framing can also make Social Security feel more like an investment decision with risk-and-reward tradeoffs [rather] than a source of lifetime income protection."

Claiming decisions involve more than calculations

In practice, clients rarely know only one end of the claiming range, though many may have heard about age 62 from friends or family, said Samuel Diarbakerly, founder and CEO of Boston-based Generation Capital Advisors.

He said clients are more often unsure about how the benefit actually works, and he noted that even strong planning cannot account for every variable.

"We don't know how long they'll live, and we don't know what tax rates will be in the future," Diarbakerly told Financial Planning in a statement. "That's why we don't treat claiming as a bet on a break-even age. We treat it as a decision about protecting lifetime income under uncertainty."

Social Security claiming choices, and the way advisors discuss them, are driven as much by behavior and psychology as by calculations about the best time to claim based on finances and longevity estimates.

"It's of critical importance … how advisors present that information, in a manner that's more relatable from a behavioral-finance side than just bringing the math," said Robert J. Patterson, CEO of San Diego-based RIA RJ Patterson Group.

Patterson added that younger people often think differently about claiming than older clients who are closer to making the decision.

"It's very dependent on the individual's current mental state, situation [and] cash-flow needs," he said.