Page 26 - Investment Advisor February/March 2023

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for women and healthier Americans, especially those with The fear about Social Security insolvency, in particular, is
higher incomes. These people receive the same annual income a major driver of mistakes, points out Joel Schiffman, head of
increase from deferral, but they can expect to receive this strategic partnerships at Schroder Investment Management:
income over more years than the average American. “Many simply want to get their hands on the assets as quickly
Such present value calculations demonstrate that getting as possible, even if that means lower overall lifetime payments.
the claiming decision right can add the equivalent of a six-fig- Others fear for the solvency of Social Security and believe that
ure windfall to a retiree’s balance sheet, Finke says. He warns drawing early is the only way to begin receiving at least a por-
that advisors who cling to less accurate methods, such as the tion of the benefits they are due.”
break-even age, to evaluate the benefits of various claiming Advisors should help their clients by taking emotion and
options may shortchange their client by tens of thousands of speculation out of the decision. “People hear about the 2034
dollars if they fail to consider the value of larger income pay- projected Social Security trust fund depletion date and it
ments made later in life. scares them, but advisors can help them understand that Social
“An advisor evaluating deferral strategies should think like Security isn’t just going to disappear in 2034 or 2035,” he says.
an insurance company when estimating the value of claim- “Even if Congress does nothing ahead of that time, which is not
ing at different ages,” he explains. “How healthy is my cli- likely, Social Security benefits will not just disappear.”
ent compared to the average American? If they are healthy, Instead, payments would be reduced by between 20%
this increases the present value of any claiming strategy that and 30% for the typical retiree. But, as Schiffman and others
increases future income.” suggest, it is highly unlikely that Congress would allow this
Other questions Finke recommends include: How healthy to happen, given the tremendous popularity of the Social
(and what age) is their spouse and how much will the deferral Security program. In fact, there are already a number of pro-
affect the spouse’s income? What is the current market rate posals circulating in Congress to help close the funding gap,
of return on inflation-protected securities? Generally, higher such as reapplying the Social Security payroll tax to individu-
Social Security income is worth more when the market places als’ wages over the current maximum of $142,800.
a greater value on inflation protection and nominal interest “Even if those cuts are in store, there is still a very good
rates are low. argument to be made for delaying the payments as long as
“Effective claiming often means overcoming the biggest possible,” Schiffman says. “The idea is that delaying the Social
barrier — clients’ behavioral biases,” he says. “Common objec- Security payments to 67 or 70 would in itself make up a lot of
tions include ‘it’s my money and I want it now,’ ‘Social Security the benefit reduction.”
is going bankrupt,’ or ‘my mom or dad died at 72, so I want to This is obviously not the preferred outcome, but it is impor-
get some of my money back.’” tant for clients to understand this dynamic. As Schiffman and
Advisors can overcome these biases by using an objective, Finke agree, clients should feel empowered in that they can
facts-based process that recognizes that Social Security is an asset take steps to protect the value
and that the goal is to maximize the asset’s value, Finke notes. of their benefit.

The role of commission-free
annuities keeps growing.

DPL’s David Lau predicts 2023 will see the continued
rise of commission-free annuities, which will in turn
expand the solution set available to advisors engaged in
income planning.
According to Lau, 2022 saw a meaningful expansion of
“modern no-load annuities” that eliminate possible conflicts
of interest for fee-based advisors serving clients in a fiduciary
capacity. A more robust set of no-load annuities enables fidu-
ciary advisors to incorporate powerful guaranteed income
solutions in clients’ financial plans.
Because the marketplace is changing so rapidly, Lau sug-
gests, advisors must work harder to update their understand-
ing of what is available in the annuity marketplace today. As

24 INVESTMENT ADVISOR FEBRUARY/MARCH 2023 | ThinkAdvisor.com