Social Security Optimization

Guiding clients to retirement income

by J. Maxey Sanderson, CLU, ChFC, FLMI

 Mr. Sanderson is President of Impact Technologies Group, Inc. Maxey’s 40 plus years of experience uniquely combines insurance and financial planning experience with the ability to translate the most complex financial concepts into easily understandable explanations and software solutions. He is co-inventor of the patented PlanFacts Social Security tools. Connect with him by e-mail:

Advisors see Social Security optimization information as a great lead into retirement income planning. And it certainly can be. However, sometimes advisors get bogged down in the details of Social Security which cause delays for the advisors and frustrations for retirees. The challenge of using Social Security as the lead is providing what the retiree wants to see, while avoiding any delays or frustrations.

Baby boomers, as they approach retirement, usually just want fast and accurate answers specific to themselves. The advisor’s end-game is not just providing Social Security information, but using it as a springboard into retirement income planning. Planning that leads to additional products being secured or resulting in new assets under management. This author, based on over forty years of experience in financial planning, as well as being one of these impatient retiree baby boomers, believes there are five factors responsible for the delays and frustrations.

First: Optimization program needs to meet the advisor’s objective

The advisor needs to be sure that the Social Security optimization program being used meets the advisor’s objectives. There are three types of Social Security maximization programs: simple calculations that provide limited capabilities, programs designed for the Social Security expert who wants to handle all possible exceptions and edge cases, and a program that helps the retiree see the answers to their questions and indicates the best strategy for them and how to accomplish it. The last category is designed for the advisor who wants to provide solid answers to his or her clients’ questions so that the information can be used as a natural lead to retirement income planning. The number one cause of confusion and frustration in a Social Security maximization interview is usually discussing all the options that don’t fit the retiree’s situation. Advisors should avoid those programs that confuse unnecessary details for accuracy.

Second: Advisors should provide answers –not an education

Advisors try to anticipate the retiree’s questions and answer them before they are asked. Most retirees need time to process one answer before moving to the next logical question. Advisors may expand on an answer to demonstrate their expertise and Social Security knowledge. This practice leads to discussing details that the retiree didn’t think applied to him or her. Most retirees want answers to their particular situation, not generalities. The advisor’s job is to provide the retiree with answers to his or her questions, not to provide a Social Security education. The interview is taking place because the retiree felt the advisor could answer his or her questions. Providing answers to his or her questions is all the retiree expects.

Third: Over emphasis of “breakeven analysis”

Many years ago, breakeven analysis was one of the few tools available to analyze Social Security. It was great at comparing two starting ages. With the available programs today, many additional factors can automatically be calculated to produce and compare thousands of starting ages, strategies, and life events. The retiree really just wants to know when and how to file under his or her circumstances and what strategy is best, not a series of what-if comparisons between two options. Almost all Social Security optimizing programs provide a strategy, when to start various components, and how to file for the benefits with Social Security Administration. Baby boomers want answers, not riddles, when they ask, “When should I retire?”

Fourth: Two “rights” may make a “wrong”

“Rules-of-thumb” that the advisor has used many times can conflict with one another when used together. For example, a retiree tells the advisor that she does not need the income from her IRA. Also, she would like to minimize taxes by deferring IRA distributions as long as possible. The first “right” answer the advisor suggests is that IRA distributions be deferred to age 70 and then to just take RMDs (required minimum distributions).

The second “right” answer the advisor suggests is to delay taking Social Security benefits until age 70 to get the delayed credits. Although each client is different, typically this combination of these two well-established “rules-of-thumb” may result in more income taxes. Starting retirement distributions early (i.e., Safe Harbor Life Expectancy Method) at age 65 produces less taxable income each year. The higher Social Security benefits starting at age 70 plus the higher RMDs starting at age 70, produces more income tax on the combined incomes.

These are just two of many factors that may come into play. My point is that each client is unique, and his or her circumstances must be examined and calculated independently to be sure the right solution is recommended. The advisor’s reliance on “rules-of-thumb” may not be right for a particular client.

Fifth: Too many details too soon

The advisor may prematurely introduce a fully integrated cash flow retirement income solution, howebver, it is best to approach retirement income planning with baby boomers in a series of steps. The first step is to determine the best Social Security strategy for that particular client. That may only require showing what the best strategy is, when to apply it, and how to implement it. The next step is looking at how the Social Security strategy works with his or her retirement plans and assets. Often it can be shown that using some of these retirement assets while delaying Social Security benefits may actually satisfy early income needs while stretching the retirement assets over a longer period.

The next step is to consider shifting some assets to annuities. This can shift investment risks and longevity risks to the annuity provider. Consider shifting some assets to life insurance in order to shift mortality risks to a life insurance company. Often, the 401(k) Plan or IRA can provide an effective tool for implementing these risk shifts. By starting with Social Security and taking one concept at a time, the advisor can go as far into the details as the client desires. If the retiree wants to see more details, he or she can provide the advisor with all of the necessary facts for the advisor to complete a detailed analysis. Often the retiree sees the need for a product and a sale is made without the need of a detailed analysis.

An additional word of caution: many fully integrated cash flow analysis programs can model the client’s financial situation in excruciating detail. Many use monthly cash flow with conditional transactions and rules so that the model is as near real life as possible. This is great for the advisor’s confirmations of recommendations. However, the client probably sought the advisor’s help because his or her financial picture in real life was just too complicated to understand. Clients often need the collection of simple concepts illustrated before they understand the big picture. Having the simple, conceptual tools to illustrate the planning steps, is often more important than the real life, detailed analysis. The solution to the challenge of moving from a Social Security initial discussion to a fully integrated retirement income analysis is doing it in small, easy to understand steps and using tools that illustrate simple concepts well. ♦