Financial clients lean on their investment advisors in myriad ways – primarily for retirement, taxes and estate planning issues.
But one area where clients really depend on their financial advisors is Social Security – specifically, Social Security withdrawal needs.
The available data demonstrates the need for good Social Security withdrawal advice – even though many Americans seem to not be getting it.
According to a study from Nationwide Retirement Institute, “83 percent of recent retirees started taking their benefits earlier than their full retirement age and those that do receive 49 percent less than those who claim benefits later.”
NRI also reports that retirees who started getting Social Security early report a lower average monthly payment ($1,174) than those who started at their full retirement age ($1,590) and those who started late ($1,752).
“If handled incorrectly, retirees could be missing out on hundreds of thousands of dollars in retirement income,” says David Giertz, president of distribution and sales for Nationwide.
Social Security withdrawal strategies become even more paramount, given recent changes enacted via the Bipartisan Budget Act of 2015. Under Section 831 of the law, Congress shut down a pair of loopholes favored by married taxpayers. Under the new statute, monthly Social Security benefits expand for each month they delay taking benefits. But one loophole enabled married taxpayers (ages 66-to-70) to begin drawing Social Security spousal benefits at full retirement age, while allowing their own retirement benefit to grow by delaying withdrawals.
Under the new rules, incentives to delay Social Security remain intact, but now recipients can’t receive one type of Social Security benefits while simultaneously drawing a bonus for delaying the other benefit. Additionally complicating matters, Congress has also raised the official Social Security retirement age from 66 to 67, depending on the recipient’s date of birth.
Thus the need for financial advisors to have multiple plans in place for clients looking for help on Social Security withdrawals.
“With over 2,700 regulations that oversee Social Security, everyone's situation is different, so we have to understand all the factors to give good advice,” says Faye Sikes, a financial planner with Scarlet Oak Financial Services, in Atlanta.
Planners who can’t find ways to structure Social Security withdrawals to maximize earnings risk losing clients to financial advisors who can. “Typically for couples making under $75,000, we have shown them ways to get up to $15,000 more per year in retirement,” Sikes says. “And for clients who earn more than 75,000, it's more like $15,000 to $30,000 annually.”
One strategy Sikes uses is aimed at widowed spouses. “Now, there are special withdrawal rules for widowed individuals after age 60, who can still pull on their deceased spouses’s Social Security account and still delay their own,” she explains.
Other financial experts say the reason why Social Security withdrawal strategies resonate so strongly with clients is a simple one – it directly affects their financial situation in retirement.
“Retirees have reason to be fearful about Social Security for two reasons,” says Ed Vargo, founder and a financial advisor with Burning River Advisory Group, in Cleveland, Oh. “First, the ramifications are far reaching; this is a decision that will affect them for the rest of their lives. Secondly, Social Security withdrawal is an irrevocable decision - there are no do-overs. You have one chance and one chance only to get this right.”
Vargo says financial services professionals have to be transparent about their client’s Social Security needs, and that they should generally favor taking cash out later, rather than sooner.
“Longevity is at heart of Social Security planning,” he says. “The longer you live, the greater the overall benefits. If someone is going to die young, say age 75, then it makes sense to take Social Security as early as possible. The problem is no one knows how long they're going to live. Given today's longer life expectancy's (and getting longer), if you're going to err on taking it sooner than later, take it later.”
“The clear path is this - if you can afford it, delay taking Social Security to at least full retirement age (FRA) and, in many cases, until age 70,” he says. Vargo’s firm covers all the bases by leveraging a digital tool that maps out ideal withdrawal strategies for individual clients. “We run Social Security optimization strategies with sophisticated software and it almost never has people taking the benefit at age 62,” he says.
A Multi-Tiered Approach
Others say there is no single best method to approaching the withdrawal situation.
“There are hundreds of different viewpoints and angles,” says John Pak, a certified financial planner with Affluencer Financial, in Los Angeles, Ca. “In my practice, I see and experience so many different scenarios where I thought the 'run of the mill' methods would do the trick (i.e., waiting to claim if you want more money or taking cash out early if you're having a hard time making ends meet) but that isn't the case. The longevity game has caused the claiming decision to get more
All in all, Pak wants his clients to truly understand the value in maximizing lifetime income sources like Social Security, Pensions, and Income annuities, as no one knows their own expiration date. “Another important step is to figure out how much income you'll need in retirement to satisfy expenses and what sources of income, if any, you can rely on to complement Social Security benefits.”
For financial advisory clients, the stakes are high on Social Security payouts.
According to Michael Turner, a financial planer with Franklin Chase Financial
Charlotte, N.C., if a client’s full retirement age is 66, and their Social Security benefit is $2,000 a month, early withdrawal at age 62 will only garner the client $1,500 a month (a 25 percent discount). “But if you wait until age 70 to start, the client will receive $2,640 (a 32 percent bonus). Consequently, the difference between age 62 and 70 is a whopping 76 percent.”
“Assuming the client lives to their 83rd birthday, the 70-year-old starter received over a lifetime $97,000 more than the 62-year-old starter and $41,000 more than the 66-year-old starter,” he says.
Clearly, with that amount of money on the line, clients are heavily dependent on the Social Security expertise of their financial advisors. For those advisors, having that expertise can mean having a client for a few years, or having a client for life.
Brian O'Connell is a former Wall Street bond trader and author of the best-selling books, such as The 401k Millionaire. He's a regular contributor to major media business platforms. He resides in Doylestown, Pa. Brian may be reached at [email protected]
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