Workers expect their defined contribution plans to play a greater role in their retirement income than annuities.
As the “baby boomer” retirement wave has descended upon the financial services industry, many professionals have added Social Security benefits planning and analysis to their practice, using one of a plethora of programs and calculators. This is a good thing, as Social Security benefits are a critical part of the total retirement income for the majority of Americans. Social Security benefit planning is typically focused upon determining at what age it may be best to claim benefits, usually using one of several types of “break-even analyses” (simple or complex), and Spousal Benefit “claiming strategies” (“file and suspend,” “restricted application,” etc.). Again, all are exceptionally valuable to the pre-retiree.
When to file benefits based only upon these methods of analysis, however, is looking at the clients’ situation in “a vacuum”; the strategies derived from such analysis need to be tested in the context of a larger, more complex problem. This is one of the reasons why the Social Security Administration removed the “break-even” calculator from the Social Security website; they were concerned that beneficiaries were making poor decisions based upon the break-even analysis alone.
Social Security benefits are only one component - albeit a critical one - of a more complex set of factors that need to be considered as part of helping a client plan for their retirement income. Other components include sources of income such as pensions or other “secure income sources,” income distributions from retirement savings, time, inflation, and most important of all, the known and anticipated expenses (and changes to those expenses) during retirement. Often, applying a “claiming strategy” within the larger set of factors, results in a counter-intuitive result for the client. Let’s look at a simple example.
For simplicity, we’ll assume the client’s Full Retirement Age is 66, with a Primary Insurance Amount of $2,000 per month. As we know, if the client waits until age 70 to claim maximum benefits, then Delayed Retirement Credits will increase the benefit to $2,640 per month (132% of their Primary Insurance Amount). Is this a good idea? Maybe; it depends on other factors. Clearly, if the client will not fully retire until age 70, then it is a “no- brainer;” they have employment income to pay their bills. But if the client is fully retiring at age 66, then it may or may not be the best course of action, because the $96,000 that they won’t collect between ages 66 and 70 will have to come from other income sources. If that income source is distributions from retirement savings, then the overall “withdrawal drag” on those retirement savings is increased, possibly resulting in a faster depletion of those assets (Naturally, this depends upon the combination of the amount of assets, rate of return, and the amount of distributions needed over time). Let’s compare two scenarios:
• Age 66 at Retirement • Savings: $600,000 • 6% Constant Rate of Return on Assets
• No Other Sources of Retirement Income
• Age 66 Total Income Need of $69,306, Growing with Inflation to $82,736 at Age 80
Begin Social Security Benefit at Age 70
Monthly Benefit of
Remaining Assets at Age 80:
Remaining Assets at Age 83:
Begin Social Security Benefit at Age 66
Monthly Benefit of
Remaining Assets at Age 80:
Remaining Assets at Age 83: $188,948
As we see above, while somewhat counter-intuitive, it made more sense for this individual - with this specific set of circumstances - to begin benefits sooner rather than later, as the “drag” on retirement savings needed to create additional income was less, resulting in slower depletion of those savings. This example is intentionally “simplified” to make the point clear. We must apply the Social Security claiming strategy to the full picture. Clearly, if there were other sources of retirement income, or a variety of other factors within the “complex puzzle,” the outcome could be very different. Nonetheless, by applying the different Social Security benefit starting ages and benefit levels to the other factors in the “complex puzzle,” we are able to provide the client with the full picture upon which to make not only the decision as to when to start benefits, but other critical decisions as well.
For purposes of this article, it is not necessary to show more complex examples, such as differing Spousal Claiming strategies, etc. No matter what the claiming strategy, the options must be applied to the other factors in the total retirement income plan. Professionals engaged in retirement income planning should use calculative tools that account for all of the “moving parts,” and can test the different claiming strategies within the context of these moving parts. At Brokers Alliance, our producer-clients have access to our IFL: Lifetime Income Using Guaranteed Annuities analysis that allows multiple moving parts to be included and tested, including when and how to claim Social Security benefits (although this is a small element of the program).
In closing, Social Security benefit analysis is an exceptionally valuable tool in retirement income planning, but it is only one piece of a complex puzzle. To truly serve our clientele, as professionals in insurance and financial services we must ensure that the client understands the impact of the claiming decision in the context of the full picture, not in a vacuum.
Jonathan C. Illig, Executive Sales Consultant at Brokers Alliance, is an 18-year veteran in annuity sales and support. Jon may be reached at Jonathan.Illig@BrokersAlliance.com.
Brokers Alliance, Inc. has been serving the Brokerage Community in the areas of Life, Annuity, Retirement & Estate Planning, Long Term Care, and Disability Insurance for over 30 years. With 50+ employees, we are devoted to growing your business with superior Marketing Programs, Case Management, and Product expertise. Call Brokers Alliance at (800) 290-7226 or visit us at www.brokersalliance.com