Social Security: The insurance professional’s secret edge

As professionals understand their role in the planning process, they also must understand when to reach out to an expert. If you are acting in a client’s best interest, you must know when to reach out to another professional who has expertise in topic areas where you do not. Life insurance professionals who are not CPAs or attorneys know they cannot provide tax or legal advice. Social Security is similar; specialized expertise is needed.

Social Security is complex and confusing, consisting of more than 2,700 rules. Considering the intricacies in this area, it is easy to make a mistake that could be costly for the client. The advisor and the client have one chance to get Social Security right. A professional who is a Registered Social Security Analyst would be valuable to your team. As we move into what some are tentatively calling the “post-pandemic” world, what now? What are some of the lasting effects the pandemic will have on our industry and how advisors work?

The value of Social Security expertise

The problem: Financial, insurance and tax professionals want to be in a position to introduce themselves and their specific skills, products and plans to prospective clients.
The solution: American workers want and deserve to receive all the Social Security income they are entitled to.

Social Security income planning is just that — planning for the most optimal time and strategy for individuals, couples and families to claim their benefits in the context of all their other financial related retirement decisions. The discovery process of helping people with Social Security is a natural segue to other retirement-related financial, tax and insurance details.

» Financial: Anyone waiting to claim Social Security to take advantage of delayed retirement credits must be able to “bridge the income gap” with other funds if they plan to stop working earlier than the claiming date. The discussion of if and how this is possible for clients involves all their income and assets.

» Insurance: The need for Medicare; other health, life and long-term care insurance; and annuities is interrelated with the amount of Social Security retirees will be collecting. Social Security is the perfect special partner topic for your Medicare, health, life, annuity, long-term care and other insurance plans.

» Tax: The interplay between income tax and the special way that Social Security benefits are taxed opens the door to comprehensive retirement withdrawal strategies and tax planning. What is the most beneficial sequence of withdrawals from a client’s taxable, tax-deferred or nontaxable accounts?

It is only when delving deep into a specific situation that the consequences are revealed to those unfamiliar with the complexities of Social Security rules and the financial impact the claiming decision has on long-term retirement finances.

A common Social Security rule surprise

As an example, let’s look at the rules surrounding the earnings test. These rules apply only to those who are are younger than full retirement age, have started collecting Social Security benefits and are still working.

The Social Security Administration does not consider someone in this age group “retired” if they have earnings over certain limits. This means they withhold a certain amount from future Social Security checks, depending on how much is earned over those limits.

The chart below shows the 2023 earnings limits information.

The problem with the earnings test comes when individuals are not aware of the rule, have not let the SSA know about the earnings and have been paid full benefit amounts before the SSA discovers the income. This results in an overpayment of sometimes substantial amounts required to be paid back to SSA.

The amounts withheld are not “lost.” Once the individual reaches FRA, the recipient receives a larger benefit check from that point on. The recalculation, known as the adjustment of reduction factor at FRA, determines how many months of benefits were withheld.

Claiming Social Security prior to FRA resulted in a lower amount subject to the reduction rates. For example, assume this individual had an FRA of 67 and a full benefit (primary insurance amount) of $2,000 per month. They began collecting benefits at 62, so they would have received 70% of $2,000, or $1,400. If they had waited until age 63 to collect, they would have received 75% of $2,000, or $1,500.

If the benefit is $1,400 per month and a total of $16,800 was withheld, that is 12 months, or one year, of benefits. Therefore, as calculated above, the individual’s monthly benefit amount would increase from $1,400 to $1,500 at FRA.

An advisor who understands this rule can help clients coordinate their claiming age with anticipated future work plans or, if after the fact, help them quickly resolve the overpayment issue.

The Social Security timing decision should not be made in a vacuum without considering all other financial, tax and insurance factors that affect retirement. It is a unique and special piece of the retirement planning puzzle. But it is a puzzle that almost all Americans will need to solve.

Ernest J. Guerriero, CLU, ChFC, CEBS, CPCU, CPC, CMS, AIF, RICP, CPFA, national president of the Society of Financial Service Professionals, is the director of qualified plans, business markets for Consolidated Planning Inc. He may be contacted at [email protected]. Martha Shedden, RSSA, CRPC, is president and co-founder of the National Association of Registered Social Security Analysts. She may be contacted at [email protected].