Not Your Parents’ Retirement Plan

Leveraging Social Security for more secure golden years

By Martha Shedden, CRPCS

There are so many challenges and decisions facing pre-retirees today. They must comprehend what is needed to achieve a more secure retirement, and appreciate the steps that consumers, and financial professionals, can each take to benefit themselves and each other. Simply stated, Social Security should be the first decision made about retirement. This often-neglected cornerstone can have a leveraging effect on the total longevity of retirement assets and retirees standard of living.

Over the past several years there has been an increasing amount of media attention on Social Security, what the rules are, when to take it, and how to maximize your election decision. What has not been discussed so much is how Social Security should be the cornerstone of your retirement finances.

Your claiming decision does not just determine how much your Social Security checks will be, it also has an effect on the other retirement decisions you consider. How long you plan to work, what assets and pension plans you have, and the effect of taxes as you withdraw assets all relate to your Social Security claiming choice, which should not be made in a vacuum without considering the larger picture.

Retirement Boomer Style

As they’ve moved through life, the Baby Boomer generation has re-written many of society’s rules and assumptions along the way. They are now retiring at a rate of 10,000 per day and the security of their retirement years is looking quite a bit different than those of their parents. Retirement planning today is not what it was thirty years ago when the majority of those retiring back looked forward to a guaranteed defined benefit pension that would continue throughout the lives of both husband and wife. Mortgages had frequently been paid off and often generous retirement healthcare benefits would fill the gaps left by Medicare.

The days of defined benefit plans have been replaced by defined contribution plans with employees taking on the majority of risk. Mortgages keep getting refinanced, but paid off by retirement? Not likely for most retirees. The current state of healthcare is unsettling and medical care costs will be one of the biggest expenses in our later years of retirement.

We all have a vision of what a happy, secure retirement looks like and the point is to work towards reaching that goal. For some reason, perhaps denial that they have reached retirement age, many pre-retirees ignore the need for retirement planning. They need a “kick-start” and the topic of Social Security is that perfect opening.

Retirement Savings and Confidence

Retirees today can expect to live another 20 to 30 years beyond their “normal retirement age” of 66. The majority have not saved nearly as much as they should have and their confidence level about retirement reflects this. According to a 2013 survey by the Employee Benefit Research Institute, the past few years have seen a sharp decline in Americans’ confidence about their retirement savings. Only 13 percent of workers feel very confident about having enough for a comfortable retirement and 28 percent are not at all confident. More than half of workers have less than $25,000 in total savings and investments. Twenty-eight percent of workers have saved less than $1,000.

It’s no wonder pre-retirees are feeling unprepared and anxious. They worry most about running out of money, the rising cost of medical care, and maintaining their standard of living in retirement. Steps can be taken to avoid some of these concerns, but others need to be considered as “what ifs” in retirement planning strategies. For those in their 50’s it’s not too late to start the process of retirement planning.

If you are currently working with a financial professional this process should have already started. For others though it’s hard to know who can help best with this complicated decision making process. When creating your retirement income plan it is best to focus on the things you can control, Social Security being the first. Therefore finding a financial professional who is educated and trained in the nuances of Social Security rules and claiming strategies is vital.

Building a Foundation with Social Security Income Planning

For most people Social Security is the most reliable “asset”* they have and their claiming strategy is the most important financial retirement decision they will make. Having a guaranteed retirement income stream that includes cost of living adjustments for the remainder of your life is invaluable. Unfortunately many, if not most, people do not realize the difference a smart Social Security decision can make in their overall lifetime benefit amount.

Due to the penalty for claiming early and the delayed credits for waiting to claim until later, the monthly amount you collect can vary by up to an additional 75% every month for the rest of your life. For couples especially this can mean $100,000 to $200,000 or more in today’s dollars. Planning for your Social Security first also has a multiplier effect on the longevity of your other retirement funds (more below).

There is a tremendous amount of misunderstanding related to Social Security claiming strategies. Many people do not realize that the Social Security Administration is not allowed to give personal case advice, and sadly the information they do give is sometimes incorrect. With over 2,700 rules in Social Security’s Handbook and thousands of explanations of those rules contained in its Program Operations Manual System (POMS), it’s no wonder that concise, correct information for your specific situation is hard to come by. Consumers don’t know where to turn for help.

Luckily financial professionals are realizing that a strong understanding of Social Security is critical if they don’t want to lose clients to other professionals who can help them. Social Security income planning is not like other financial services. It’s not a product to sell and it doesn’t provide ongoing asset based fee commissions. What it does do is open doors and start conversations with anyone over age 50. Believe me, tell someone you do Social Security income planning and, even though they don’t really know what that entails, their eyes light up and most likely you’ll be talking to them for the next 10 minutes. As mentioned above, Social Security is the foundation of retirement planning. The personal connection and trust you develop with clients from SSIP often leads to opportunities for other financial services. This is a market that is wide open, but may not be for long.

Designing Secure Retirements

Retirement planning should always begin with a detailed examination of what the clients’ anticipated financial “needs and wants” will be throughout their retirement years. This will help to focus on critical expenses and see where there may be opportunities for modifications. Then, once a clear picture of their Social Security is determined by pre-retirees, retirement planning can continue around this given income. As an example, maybe a couple’s ideal maximization strategy involves waiting until full retirement age (FR) for the higher wage earner to “file and suspend” so the lower wage earner can collect a spousal benefit. Both then have the opportunity to switch to their own benefit amounts at age 70, which have grown by 32%. The survivor of the couple is then able to collect the highest benefit possible in those later years.

Given that over half of all retirees still claim Social Security at the earliest age of 62, the prospect of waiting another 4 years or more to claim is unsettling to many. Fears about the fiscal strength of the Social Security Trust fund are common and there is a sense that it “won’t be there for me”. This is where accurate understanding of the topic is critical for financial professionals so they can educate clients and prospects. Then the options for building a retirement around Social Security are wide open.

Working longer of course is an obvious choice and will provide three main benefits. The calculation of your Primary Insurance Amount (PIA, the amount you will receive at FRA) is based on your highest 35 years of earnings. Since many people are seeing those higher earnings in their later years of work, this increases their PIA amount. The more years we work of course decreases the years of retirement that we will need to fund. And finally, the Social Security “earnings test” applies to those who are collecting Social Security and still working prior to their FRA, but not after that age. Advisors are wise to alert their clients to these options, show them how the earnings test works and demonstrate using software tools how much waiting to claim can improve their financial security.

Finally, by examining all assets, pension and other income, a detailed plan can be developed to provide income as well as continued growth of investments throughout the retirement years. A warning here ~ careful consideration should be given to “provisional income”, which is the sum of wages, taxable and non-taxable interest, dividends, pensions and other taxable income plus 50 percent of your annual Social Security benefits. Most retirees are not aware that 50 to 85% of their Social Security benefits may be taxed under this provision. It will now be evident where gaps may exist in the retirement plan and financial professionals can help address these needs with products such as annuities and life insurance.

Financial Professionals

Advisors and planners, as well as CPAs, are searching for correct, understandable and succinct Social Security information that they can learn quickly and feel confident about in their discussions with clients and prospects. There are a number of options for learning the Social Security basics including many excellent books and recorded programs. Just this past year the National Social Security Association, http://clientfirst.info/nssa-social-security-advisor-certification/ began offering one-day that provide CE units and the option of taking an exam to become certified as a NSSA, National Social Security Advisor. Besides learning the rules and strategies from experienced instructors, the NSSA designation clearly establishes you as someone who is serious about helping clients with this important decision.

In addition to becoming educated on Social Security income planning, retirement planning professionals will want to seek out the best, most user-friendly software tools available. Once the Social Security claiming strategy is determined, the “big picture” retirement software such as Retirement Road Map, eMoney and MoneyGuidePro can be utilized. Many of these are now adapting their programs to incorporate specialized Social Security claiming strategies into clients overall financial planning. For Social Security practice management tips and marketing expertise, out firm, ClientFirst Financial, www.clientfirst.info is a valuable resource for financial professionals as they incorporate this service into their practice.

Conclusion

It is critical for the Boomer generation to be aware and understand how critical Social Security income planning is to their retirement. They should be demanding that financial professionals provide this service to them as they start their retirement planning. Providing Social Security income planning is still in its infancy within the financial industry. Therefore huge opportunities are available to those retirement financial professionals who obtain the knowledge and technology to educate and advise consumers.

*The future dependability of the Social Security Trust Fund is a whole other topic, but for those in the Boomer generation the current rules and strategies will most likely remain intact.