Why You Need 5 Dimensions Of Social Security Testing

By Curtis V. Cloke

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Advisors know two things -- Social Security has taken on increasing importance in retirement planning with the decline of traditional pensions, and clients should time their Social Security withdrawal start date to get the maximum payment.

One of those things might not always be correct.

It is a veritable mantra for advisors to counsel their clients to plan for the latest start date for the maximum benefit payment. But that might not be to the optimal maximum benefit for the client.
Right now, 66 percent of beneficiaries are either critically or totally dependent on Social Security to maintain their standard of living in retirement. As more people rely on Social Security as their primary source of retirement income, advisors are in a unique position to show their clients how to turn their benefits into a safe stream of lifetime income.

The No.1 risk in retirement is longevity risk of outliving one’s money. Social Security is a source of guaranteed lifetime income that can help reduce this risk, but many clients are being told to delay claiming Social Security benefits to age 70, or their maximum withdrawal date, to get the most out of their benefit.

This article will focus on those who may be worse off delaying Social Security because of what I call the fourth and fifth dimensions.

Much of the Social Security software that advisors use focus very well on the first three dimensions, which are:

1 The age of the Social Security recipient and the age of their spouse.
2 Social Security benefits at ages 62 to 70.
3 The crossover point of age or duration, for certain life expectancies of individuals and what this may provide in total lifetime income for that individual or couple.

These three-dimensional tests work perfectly well for clients who have the income and assets to extend their Social Security start date to ensure the maximum benefit. So, they would not need to create an income bridge that would drain their personal assets before Social Security kicks in.
However, if the pre-retiree is planning to liquidate some assets to build income until that magical date, then there are two additional dimensions that must be tested to determine if the Social Security delay is financially healthy.

The other two dimensions are:

4 The early taxes triggered from liquidation of assets used from the portfolio to create the income bridge.
5 The loss of earnings that the source of the personal funds would had produced if not used early when the bridge of income was not required.

I have seen cases where the only available liquidity for an income bridge was the last five years of a 20-year, highly taxed bond. Sometimes the loss of these additional two analytical dimensions (taxes and loss of performance) renders the projected improvement of squeezing more out of Social Security to actually be a loser.

This may also drain more in asset value during the years leading up to and following retirement, resulting in more risk and less value realized by the additional Social Security payments provided by the delay.

Finally, consider the long-term impact on the private portfolio to build the income bridge. If the bridge requires the unsafe withdrawal rate of, say, 6% to 10% in the first years of retirement, the client likely will suffer an undue sequence of returns risk. That risk imperils the 18- to 25-year crossover point necessary to claim any monetary victory in the choice to delay Social Security.

Considering the five dimensions of Social Security delay and contrasting the withdrawal drag risk associated with the decision to delay, may provide a more sound base of analytics necessary to determine when the retiree is better off delaying Social Security vs. those who may be better off taking it early.

Some retirees are being told by advisors to delay when maybe the decision is either riskier or a bad idea. Our ultimate goal should always be to help clients lessen the amount of income they need to withdraw from their personal savings in the early years, during the highest risked period that could damage premature drawdown and always consider other factors that might be ignored that may reverse a decision to delay.

Curtis V. Cloke is an award-winning retirement expert and CEO of Thrive Income Distribution System, LLC and Retirement NextGen retirement software. Curtis is a renowned industry speaker and workshop educator and has over 35 years of experience in retirement planning and serves as an Adjunct Professor for the American College RICP. He has an active financial practice and is a 21-year MDRT member, a two-time Court of the Table and 11-time Top of the Table qualifying member.