Social Security is a valuable retirement asset. With a lifetime guarantee, government backing and an 8 percent rate of return for delayed collection, it's an excellent adjunct to any portfolio.
Yet many retirees don't know how to make the most of their benefits. According to the Nationwide Retirement Institute, 86 percent of future retirees don't know what factors determine the maximum amounts they can receive, and roughly one-quarter of current retirees overestimated their benefits.
At the same time, over two-thirds of retirees report their expenses have stayed the same or increased. Among those who report a lower quality of life in retirement, the top reasons are:
- Income
- Cost of living
- Expenses
Health care expenses in particular keep 1 in four retirees from living the lives they expected, and most couples see medical costs consume two-thirds of their Social Security checks.
Sounder Social Security strategies can make retirement more affordable, but consumers need help to get there. Most aren't receiving Social Security advice from their advisors, and the majority of those who do have had to initiate the discussion themselves. Overall, the current situation presents a perfect opportunity to advisors who want to gain new business and add value for current clients.
In part one of this series, we discussed the impacts of collection age and the reasons why today's retirees probably don't need to fear the end of Social Security. In this installment, we'll cover specifics: how to estimate a client's benefits, make the most of SSI and incorporate it into a tax-efficient income plan.
Determining clients' benefits
The maximum Social Security benefit for someone turning 66 in 2017 is $2,687 per month; the average benefit overall is $1,342.
How can your clients figure out where they're going to fall?
The Social Security Administration looks at your best 35 years of earning, and other years' zeros don't matter," says Beth Blecker, CEO of Eastern Planning.
More specifically, the SSA looks at the 35 highest-earning years in today's dollars. Those earnings are divided by 420 (35 years x 12 months) to arrive at the Average Indexed Monthly Earnings (AIME). To determine the primary insurance amount, the AIME is run through a benefits formula with different multipliers, similar to the application of income tax brackets. Maximum countable earnings are the same as the payroll tax limit – $127,000 in 2017.
The SSA offers a retirement estimator to simplify consumer calculations, but clients must understand the basics. Part-time work and time off can drastically lower AIME, but just a few years of full-time work can bring it back up. If you have a client on the fence about early retirement, a better picture of their earnings history may encourage them to keep working for a few more years.
Business owning clients should also take note: It pays to take a salary.
"A lot of business owners try to keep their salaries as low as possible, but that's part of the reason why they tend to hate Social Security," says Blecker. "Pay yourself so you're actually putting money into the program."
Minimizing taxable income is the go-to strategy for many small-business owners, but for most self-employed clients, it's a safer bet to mark down at least a modest taxable income.
Spousal considerations
"If you're filing and married, it's not a 'me' decision, it's a 'we' decision," says Franklin Templeton financial planning spokesperson Gail Buckner. Maximizing a couple's retirement income requires a coordinated claiming strategy – especially when one spouse has significantly out-earned the other.
As important as spousal benefits are, plenty of consumers are still in the dark.
