New Strategies for a Defined Outcome Plan
by Mark E. Caner, AEP, ChFC, CLU, CFPMark E. Caner is President of W&S Financial Group Distributors, Inc. Connect with him by e-mail: [email protected]
“Our money’s gone … but we’re not.”
That’s a statement financial professionals hope never to hear. The prospect of such an existence, one where retirees exhaust their financial resources, is frightening to contemplate. Yet many clients can’t dismiss the possibility. In fact, such a scenario prompts real anxiety among both pre- and post-retirees.
Thankfully for American workers, Social Security helps address this fear. It provides retirement income or survivor income to dependents in a manner like few other financial instruments:
- Recipients can’t outlive it.
- Recipients receive cost-of-living increases to it (automatic increases based the Consumer Price Index, although there were none for 2010 and 2011.)
- Recipients needn’t be investment experts to take advantage of it.
For most everyone, those advantages are powerful. The question is … although Social Security provides income, can it alone provide an adequate income? Likely not. Benefits generally replace about 40% of an average wage earner’s income after retiring.**
But how benefits are managed can make a difference. Certain claiming strategies can enhance Social Security benefits — in effect, taking advantage of timing and filing status flexibility to produce the most beneficial result. Given concerns about certain retirement risks, such as longer lifespans and rising healthcare costs, these strategies may not only be prudent, they may be essential.
Securing adequate retirement income is one of the most important challenges most people will ever face. And they are likely to look to financial professionals for help. Strategies you can discuss with your clients to help them clients “size up” the outcome of their retirement income from Social Security and other sources fall into two categories:
- Optimizing the program’s benefit
- Supplementing the benefit from other sources
Let’s consider both categories in the context of pursuing the best possible defined outcome plan for retirement income.
Optimizing Strategies: Consider Possibilities
There are a number of specific strategies the Social Security Administration offers which can be used to pursue making the most of the income benefits. Here are a few key ones.
This is a simple strategy many people know yet few employ. In fact, according to the Social Security Administration, four in 10 retirees take a reduced early benefit as soon they’re eligible at age 62. The alternative requires foregoing taking Social Security until full retirement age (currently 66) – or beyond – in an effort to create significantly more income. First, doing so adds more earning years to a person’s Social Security record. Higher lifetime earnings may produce a higher benefit at retirement. Second, for those born in 1943 or later, for example, each year of delaying the start of Social Security beyond full retirement age increases the benefit by 8%. Delaying could provide a surviving spouse with a greater benefit as well. Note that the Social Security benefit amount is maximized at age 70. (Source: “Retirement Planner: Delayed Retirement Credits,” SocialSecurity.gov, Aug. 7, 2013.)
It doesn’t always pay to delay. For those in diminished health or with shorter family life expectancies, it may be more advantageous to start taking Social Security benefits as early as age 62. For these individuals, simply having the program’s income as soon as possible could be more important than potentially maximizing benefits over a longer period.
File and Suspend
This strategy is a matter of starting – then stopping – Social Security for maximum effect. When a worker reaches full retirement age but continues to work, it may be advantageous to file for benefits and immediately suspend them. Filing for Social Security allows a non-working spouse the opportunity to receive benefits. (A spousal benefit is not payable until the worker files.) Suspending allows the working spouse to continue earning additional benefits up to age 70.
In some situations, it may be a good idea for a lesser-earning spouse who retires early to start Social Security at age 62, while the higher earner continues to work to age 70. The early retiree may find it advantageous to switch to a spousal benefit, thus increasing monthly benefits.
Clients must carefully consider their options. Because each person’s potential benefit differs, it is important to make certain that a Social Security claiming strategy suits the retirement and survivorship circumstances and objectives of the individual. Understanding the retirement, spousal and survivor benefits specific to an individual situation is essential to receiving all the benefits that may be available.
Supplementing Strategies: Coordinate Resources
Even with optimization, seldom will a Social Security benefit alone be enough to maintain the standard of living people may need in retirement. According to the Social Security Administration, 63% of total income of persons aged 65 or older comes from sources other than Social Security. (Source: “Fast Facts & Figures,” Social Security Administration, 2012.)
You can help your clients consider the resources they have which can be used to supplement Social Security. If these sources provide sufficient income early in one’s retirement, they can allow the start of the Social Security benefit to be delayed which, as discussed above, can increase the amount. The strategy seeks to bridge the gap between stopping working and starting Social Security. Examples of resources that can help accomplish this include:
Employer-paid defined-benefit retirement plans, where still provided, are a great way to immediately supplement and potentially optimize Social Security. Pension income tapped early in retirement may allow Social Security income to be deferred until later in retirement, when it may commence at a higher level.
Employee Retirement Plans
Starting the distribution drawdown of 401(k) or 403(b) plan assets will generate retirement income and possibly allow for the delay and increase of Social Security income
Savings and Investments
Drawing on personal savings or tapping personal investments for income, on either an as-needed or systematic basis, can help postpone and enhance Social Security payouts.
When one is in retirement, there may be less need for a second car or other property that is both valuable and marketable. Proceeds from the sale of such items can help delay Social Security with the goal of increasing it.
Although people usually call it a career when they retire, it is possible to continue working part time, possibly in a new field or area of personal interest, in the early retirement years. This, too, can help delay taking Social Security and increase its value.
IRAs and Nonqualified Annuities
These strategies are popular ways to bridge the early retirement years with financial products designed to meet monetary needs. Annuities, for example, can bridge the income gap and possibly offer continued growth and guarantees. Options include both deferred and immediate annuities, annuitizations for short-term or lifetime needs and death benefit protections to enhance survivorship well being.
Next Steps: Help Clients Make the Most of their Retirement Income Outcome
This article reviews just a few ideas you can discuss to help clients size up Social Security benefits in an effort to optimize their claiming strategy in coordination with their other retirement income resources.
A good place for you and your clientele to learn more about this topic is to visit the Social Security website at SocialSecurity.gov. It’s also a good idea to suggest clients regularly check their online Social Security statements for information and accuracy. It’s important to do this as the government no longer mails annual paper statements to most workers.
By helping your clients understand ways to optimize and supplement Social Security, you become a trusted resource in their eyes, one who’s concerned with their financial preparedness – not just trying to make a sale. It’s a great way to build a consultative, value-oriented, professional-client relationship.
About W&S Financial Group Distributors, Inc.
W&S Financial Group Distributors, Inc. (WSFinancialPartners.com) distributes fixed, variable and immediate annuities and life insurance products from Western-Southern Life Assurance Company, The Western and Southern Life Insurance Company, Integrity Life Insurance Company and National Integrity Life Insurance Company, all member companies of Western & Southern Financial Group, Inc.
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**Source: “Understanding the Benefits,” Social Security Administration, 2013