The annual Social Security Statement provides a useful client building opportunity to financial advisors by providing an estimate of the level of Social Security benefits a person can expect. Research my company has done found that most people 1) carefully review this estimate, and 2) incorporate it into their planning about when to retire. But most also misinterpret the information: they think the estimate is what they will actually be able to spend. But they are wrong, because they usually overlook two factors. First, Medicare Part B and Part D premiums are deducted from this benefit, reducing it considerably. Additionally, it is most likely that these premiums will take an increasing share of the Social Security check, for one simple reason: Medicare premiums are going up faster than inflation and there is every reason to believe this will continue. Indeed, the 2007 Social Security Trustee’s Report estimated that by 2037, on average, Medicare Part B and D premiums and co-pays on Medicare covered services will take 70% of the average Social Security benefit.

The other issue is that Social Security benefits are taxed for those with income (including investment income) above a basic level. Married clients with income of at least $44,000 will have 85% of their Social Security benefits taxed. Thus, the estimate is far from what those receiving benefits will actually get to spend, and it is important that this misconception is clarified.

The annual Social Security statement is a great planning tool. You know when your clients get it. It is important and useful to call clients right after they receive the statement, go over it with them, let them know what will be taken from their benefits and start showing them the best way to build on the Social Security foundation. The statement is annual and so, I believe, should be your follow up call.