For many years the Social Security system has been projected to begin running a deficit within the next decade or so, and the recent COVID-related economic crisis only exacerbated the problem as fewer workers were paying in, and more people were claiming retirement benefits.

But, according to the most recent figures published the Social Security Administration, as of 2019, the program still had reserves of $2.9 trillion. Under current projections the SSA Trustees say that those reserves will be exhausted by the year 2034, after which time benefits may be reduced, Social Security taxes may be raised or both (as has occurred in the past).

That said, even if/when retirement benefits are reduced, it’s likely that the process will be gradual, and both current and future beneficiaries will be affected.

Yes, for every year that clients wait to take Social Security (up until age 70), their benefits will increase by a certain amount, depending on the recipient’s “full retirement age.” The benefit increase range is from 5% for those waiting until age 63, up to 8% per year for those who have reached full retirement age. For instance, if the recipient is entitled to receive $2000 per month at age 67, they would instead get $2,160 per month if they wait until age 68.

But that “8% increase” doesn’t account for the fact that the recipient has now missed out on a full year’s worth of checks (in the case above, $24,000). They need to collect 150 of the slightly-higher monthly checks (about 12 ½ years’ worth) before they will make up for the foregone $24,000.

The actual rate of return gained by waiting depends on several factors, including the client’s lifespan, future investment returns, couples claiming options and any changes to the tax code and benefit rules. Mike Piper, CPA and author of the book Social Security Made Simple, says that the actual return of waiting to take Social Security is about 1.8% above inflation for an unmarried male and 3.0% above inflation for an unmarried female.

That’s still better than nothing—but it’s not 8%.

Many clients are aware that Social Security benefits claimed before reaching “full retirement age” can be reduced if the recipient’s income exceeds a certain amount. For 2021, that figure is a loss of 50 cents of benefits for every dollar earned over $18,960.

But that threshold is only comprised of active/earned income, not interest, dividends, inheritances, IRA distributions, pensions or passive income (such as rent payments). And, only income earned by the recipient counts—not income earned by a spouse.

Even if a recipient loses Social Security payments because of earnings, once the recipient reaches full retirement age they will get those lost benefits back in the form of a slightly-higher monthly check.

Those clients who have most or all of their money in tax-deferred accounts are usually much better off tapping Social Security for support in retirement.

Every dollar withdrawn from IRAs, 401(k)s, etc. is taxable as ordinary income. Whereas Social Security is subject to a “means” test to determine if it’s even taxable at all.

The formula is to take the recipient’s adjusted gross income, add in non-taxable interest (i.e., that generated by municipal bonds) and then include half of the recipient’s Social Security payments.

If that result is above $44,000 for joint filers ($35,000 for singles), 85% of the Social Security payments will be taxable. If it falls between $32,000 and $44,000 for joint filers ($25,000 to $34,000 for singles), only 50% of the payments are taxable income.

And if the result of the formula is below $32,000 for joint filers ($25,000 for singles), then the Social Security payments are completely free from federal income tax.

Better yet, 37 of the 50 states don’t have any state income tax on Social Security payments, and nine others allow some or all of the benefits to be exempt from state income tax, often dependent upon age and income. Each state’s provisions are detailed here: taxfoundation.org/states-that-tax-social-security-benefits/.

If you go by what most personal finance writers and reporters say, it’s so smart to wait to take benefits that it’s just conventional wisdom to do so.

But your clients will likely be surprised to find out that, according to a study released in 2020 by the Bipartisan Policy Center, almost 35% of men and 40% of women claim Social Security at age 62. The same report said that by the time they reach full retirement age, about 85% of Social Security beneficiaries are taking their checks.

Most of those claiming before reaching full retirement age are doing so out of necessity, rather than by choice, but don’t be surprised if even your middle-class millionaire clients still choose to take Social Security before the most-optimal age.  They might like the idea of preserving their investments for spending, giving, or growing. They probably will appreciate a regular check coming in to replace their lost paycheck. And, in the vein of myth 1, the clients could simply be concerned that they (or Social Security) might not last long enough to get the full financial payoff from delaying payments.