Why Social Security Claiming Comes First in Retirement Planning

Social Security must be considered a retirement asset. Given that the average monthly benefit payable in January 2022 will be almost $1,660 ($19,884 annual), a retiree living for another 25 years will collect over $497,000. Equity in homes is another hidden asset that can be tapped if needed. So, for many retirees, Social Security is their largest asset.

'A Holistic Plan Is Whole'

As Lane Martinsen wrote in his article The True Meaning of Holistic Planning, "A holistic plan is whole" and "optimizes all of a client's assets" in this phase of life. Furthermore, "the value of this type of plan is found in identifying strategies that enhance retirement efficiency over time."

A holistic approach prepares people for retirement by examining the various elements that make up a client's "total wealth framework," not only investment accounts but also mortgages, tax strategies, health care, long-term care and estate planning.

One of the retirement income elements that affects sequencing of withdrawals from accounts is the required minimum distributions, RMDs, from individual and employer-sponsored retirement accounts including regular IRA, 401(k) and 403(b) accounts. The IRS has very specific rules about RMDs, and retirees cannot keep retirement funds in their accounts indefinitely. These distributions can create a significant increase in income, and therefore taxes, beginning at age 72.

Holistic retirement income planning can offer strategies to minimize taxation by coordinating the possible significant increase of Social Security income at age 70 and income generated from RMDs. These strategies can include planning for Roth conversions early in retirement and the use of retirement accounts to reduce RMD amounts and cover the income gap if claiming Social Security at age 70.

Retirement Decumulation Planning

In many ways, the financial planning associated with retirement years is very different from that needed as we move through our working lives. After decades of working hard, saving and investing to accumulate assets that can be used in retirement, the thought of using those assets is unnerving to many soon-to-be retirees.

Retirement financial planning requires proper management and decumulation considerations of the client's total wealth framework in a holistic way. Perhaps the three most important goals are extending the life of portfolios, managing income taxes, and allocating funds for future unexpected health care and long-term care costs.

Showing clients how you can provide such an all-inclusive retirement financial road map builds their confidence in your abilities as a financial advisor.

As a financial planner working with clients before retirement, start by evaluating and repositioning their income-producing and growth-oriented accounts. Work toward their retirement goals by maintaining or increasing their standard of living and providing assurance that their finances are secure through their retirement years. Your clients will thank you.

Martha Shedden is the president and co-founder of the National Association of Registered Social Security Analysts (NARSSA), in which she leads the development of the education and training program for all registered Social Security analysts (RSSAs). As an RSSA and CRPC, she is a leading expert in the field of Social Security, has authored many articles and white papers, and has presented on the topic numerous times. She is also the host of a podcast, Social Security: Answers From the Experts. She is passionate about educating financial professionals and retirees on the details of Social Security income planning, the foundation and first step to creating a financially secure retirement plan. Follow Martha and NARSSA on LinkedIn.