Page 32 - Investment Advisor March 2021

Cover Story

Remember that the income increases calculated by Social more than the $1,000 he client would get at age 67, and 72%
Security are fair for an American of average lifespan and higher than the monthly benefit amount the client would have
during a period with positive real interest rates. For healthy collected if you began at age 62.
Americans today, delayed claiming provides an (actuarially) Only about 4% of retirees make the optimal Social Security
increase in total wealth. claiming decision. This results in a loss of wealth of roughly
While benefits are available as early as age 62, claiming $2.1 trillion for current retirees that made a suboptimal
later permanently raises monthly benefits with the maximum claiming decision.
benefits available to those who claim at age 70. There’s a 6% Additional United Income estimates demonstrate that
reduction in monthly benefits for each year one begins receiv- future retirees could lose an estimated $3.4 trillion in potential
ing benefits before full retirement age. income that could be spent in retirement due to suboptimal
For someone whose full retirement age is 67 but decides to claiming decisions.
begin benefits at 62, that means approximately 30% less per
month than if waiting until age 67. Optimal Claiming
If your client is able to wait, delaying claiming past the full Many advisors have become accustomed to using a break-
retirement age means they will gain about 8% more in monthly even calculation to evaluate claiming strategies. This generally
benefits each year, up to age 70. For someone with a full retire- involves telling a client the age at which increased payments
ment age of 67, delaying Social Security retirement benefits from waiting a couple of years will eclipse the payments
until age 70 would result in a 24% increase in the monthly received by claiming early. This method may cause a client to
benefit amount. dismiss delayed claiming as a gamble that they’ll be alive at
Here’s another way to think about the financial impact of that age to benefit from the strategy.
early claiming. Assume the initial monthly benefit is $1,000 if a Other advisors may discount future payments using the
client claims benefits at the full retirement age of 67. If the cli- expected historical rate of return on portfolio assets. This
ent begins collecting benefits at 62, the monthly benefit would would result in placing significantly less value on payments
be $700 — that’s a 30% reduction. occurring 25 or 30 years in the future.
But if the client can wait to begin collecting benefits until Social Security income payments are far more valuable than
age 70, the monthly benefit would be about $1,240 — 24% a hypothetical risky return that is not adjusted for inflation.

the CPI exceeds the previous highest level. This is why there Social Security COLAs are designed to increase purchasing
was no COLA increase in 2010, 2011, and 2016. power enough to keep Americans out of poverty. Managing
inflation for a wealthy retiree requires different strategies that
Planning for Future Retirement Expenses may involve the use of insurance to protect against health cost
One of the most difficult aspects of planning for expenses in retire- risks and investments that historically outpace price increases.
ment is estimating the cost of health care over an uncertain lifespan. According to the Social Security Trustees, the combined
Over the past two decades, the Medical Care Services category of Old-Age and Survivors Insurance (OASI) and Disability
the CPI experienced one of the highest increases in price inflation. Insurance (DI) trust funds face a financial shortfall of $16.8
As retirees live longer, financial advisors will need to help trillion in present value through 2094 and $53.0 trillion over
people plan for the high costs of assisted living facilities. The an infinite horizon.
median cost of assisted living care was $51,600 a year in 2020, Further, the Social Security trust funds will be depleted and
while the median cost for a private room in a nursing home was unable to finance full benefits in 2035.
$105,850, according to the Genworth Cost of Care Survey. Unless Congress takes action to reform Social Security, the
While the Social Security COLA is based on the CPI-W, which program will only be able to pay approximately 75% of estimat-
itself is based on eight major categories of spending, it is not a ed benefits when the OASI trust fund runs out of assets in 2035.
perfect measure of everyone’s cost of living. The Medicare program also faces a funding shortfall, with the
Budget shares for housing, energy and food may be higher most recent estimates suggesting that the hospital insurance
for retirees in certain regions, while the cost of health care rises trust fund could be depleted in 2026.
with age. Younger and wealthier retirees may spend more on Financial advisors will need to help clients navigate the uncer-
leisure and travel. tainty and risk associated with the impact that the impending
Financial advisors need to recognize that changes in Social depletion of the Social Security trust funds will have on Social
Security likely will not match changes in their clients’ expenses, mak- Security retirement benefits, Medicare premiums and retire-
ing the inflation protection an imperfect hedge against price volatility. ment security. —Jason Fichtner and Michael Finke

30 INVESTMENT ADVISOR MARCH 2021 | ThinkAdvisor.com