07.05.18
Educating Clients on Social Security and What’s Really Underpinning Their Retirement Stools
by: Rich Blake
When it comes to Social Security, the most commonly discussed gap concerns the one currently around $11 trillion, standing between the system’s trust funds and their long-term solvency. A related — but underappreciated — gap has to do with the alarming disconnect between what soon-to-be retirees assume about Social Security. Because there’s the role they think it will play in their income replacement plans, and then there is reality.
More than half of future retirees indicate Social Security as being their primary source of retirement income, according to a survey released this past spring by the Nationwide Retirement Institute. Only 18 percent of respondents viewed a pension as their primary source of income in the survey, which shows not only changing employer benefits but also a drastic change in how people need to be planning for retirement.
Considering that the average monthly Social Security stipend is about $1,400 — and then factoring in the costs of housing, food and healthcare — the problem of such misplaced thinking about what is merely one leg of a three-legged stool becomes quickly apparent. Meanwhile, future retirees who were surveyed expect to receive $1,628 on average each month; those surveyed who are already in retirement report that they are only collecting $1,257.
Correcting these blind spots will fall to financial planners, said Tina Ambrozy, president of sales and distributions at Nationwide. “There’s a major disconnect,” she said. “The industry will play a crucial role helping fill the knowledge gap.”
The Nationwide survey, which targeted adults age 50 or older who plan to collect Social Security or who already do, highlights the importance of optimizing social security benefits to prepare for retirement.
The Social Security Administration, as well as many financial institutions (Nationwide included), have created free tools for calculating information such as the extra monthly income to be gained by putting off retirement even a few years. However, there's a lot of ground to cover, and individual circumstances to consider once these conversations really begin in earnest.
"The tools help people begin to close the gap between their expectations and the reality," Ambrozy said. "But then planners and clients can really get into the substance of what's going to be needed to close the gap so that expectations for retirement income can be met."
While it’s certainly problematic that so many people seem to be mismanaging their benefit expectations, there's another unsettling truth to be confronted — that is, for many people Social Security will be the main component of monthly retirement income. Which makes optimization strategies even more critical.
Building a Bridge
Here are three major components for financial advisors to keep in mind when sitting down with a client to bridge the Social Security knowledge gap:
- Timing is everything: Workers increase monthly benefits by two-thirds of 1 percent for every month they put off receiving benefits past full retirement age (67 for those born after 1960) and before age 70 when further benefit increases cease to apply. So again, that’s 8 percent, per year, for three years. But there are situations when it might make sense for a worker to collect partial benefits sooner, as early as age 62, while working part-time.
- Don't oversell your expertise: Counterintuitive though it may seem, Ambrozy cautions advisors from trying to be an expert on Social Security. "There are 2,000+ rules in the Social Security guidelines,” Ambrozy said, “so odds are that you'll never be an expert and be able to manage it effectively.” Know what tools are out there to help you advise clients on Social Security and know how to use them.
- Flexibility and Transparency: Once someone makes their decision on when to start collecting benefits, it is important to understand the decision is not irreversible. People can always opt out and rejoin later. More importantly, the accounting work is all handled and tracked individually by the SSA. So, let's say there’s a situation where a worker collects a partial benefit and keeps working scaled down hours or leaves a job but takes a part-time side gig. If they exceed the allowable earnings limit, benefits can be withheld. However, there’s no reason to hide or avoid extra income. For one thing, SSA will adjust the benefit once the worker reaches full retirement age, refiguring payments to credit past withholdings, said Jim Borland, Acting Deputy Commissioner for Communications.
Even as Social Security continues to work on bolstering its reputation as a program on which the American public can count, the Nationwide survey suggests confidence in the system is eroding. Such sentiment may not be misguided.
Last month, the Social Security Board of Trustees released its annual report on the long-term financial status of the Social Security Trust Funds. The combined asset reserves of the Old-Age, Survivors and Disability Insurance (OASDI) Trust Funds are projected to become depleted in 16 years, with 79 percent of benefits payable at that time.
Ambrozy said Nationwide have been doing this Social Security perception-versus-reality research for four years, and over the course of that period, some major trends have jumped out.
“Optimism about what will happen in retirement is going down,” she said. “Many people don't feel like Social Security is going to be around.”
Rich Blake A veteran journalist based in New York City, Blake has covered the financial world for numerous publications, including Institutional Investor, ABCNews.com and Reuters. Blake was a co-founder and executive editor of Trader Monthly magazine. The Buffalo native is the author of three nonfiction books, including “The Day Donny Herbert Woke Up,” which is currently being adapted into a motion picture. In 2004, Blake was nominated for a National Magazine Award in the Reporting category for Institutional Investor.