Urban myths are fun, and generally come in two formats, according to “Top 10 Urban Legends & Myths” from Toptenz.net:
One is amusing: The term Berliner refers to a citizen of the German capital, but it was also the name of a popular pastry around the time of the JFK’s famous Cold War “I am a Berliner” speech, which therefore roughly translated to “I am a jelly donut.”
Another is creepy — a driver picks up a beautiful young hitchhiker, only to have her mysteriously vanish upon reaching her destination. Inquiring of her whereabouts at a lonely, isolated farmhouse, the driver is shocked to learn she died years earlier in a traffic accident.
Creepy fun is one thing, downright scary is another, and not something to experience in retirement. Irrational fears promulgated by misconception and myth do lasting damage to even the best laid retirement plans. Following on my last post, and based on years of research and thousands of client interactions, we present five more Social Security myths we most often hear:
5) Social Security has nothing to do with asset allocation
So a client has a guaranteed stream of income that will have no impact whatsoever on their weightings in other asset classes? We hope our question is rhetorical, and advisors immediately see the flaw in such thinking.
The Takeaway: The same could be said of asset location, and the significant impact Social Security has on the coordination and composition of the portfolio, as well as the tax-efficiency of subsequent withdrawal strategies.
4) Take benefits as soon as possible and reinvest them for a higher return
Look for more of our research on internal rates of returns in upcoming posts. For now, suffice it to say your clients receive a guaranteed stream of income with no fees. If they delay payments, that’s bumped up by 8 percent a year (or 32 percent over four years) in addition to the amount they receive at full retirement age.
The Takeaway: Think advisors can do better? Good luck. See Morningstar’s three- and five-year ratings if you need more convincing.
3) Follow certain Social Security rules-of-thumb
Advisors are taught that each planning scenario is different, and based on the individual client’s hopes, wants and needs in retirement. It’s no different with Social Security planning, which is often their largest financial decision. Six canned claiming strategies won’t cut it. File and suspend is currently garnering much of the press attention. It might be the right strategy, but that doesn’t mean it’s always the right strategy, and restricted application is actually recommended more often.
The Takeaway: As with all things financial planning, customization is key.
2) Clients with public pensions are never eligible to receive Social Security
Teachers, police officers, firefighters and government employees work hard (and often put their lives on the line) only to miss out on all to which they’re entitled. If someone told your clients they are never entitled to Social Security benefits, they’re wrong! The confusion stems from two overlapping and interlocking laws—the windfall elimination provision (WEP) and the government pension offset (GPO)—which may reduce, but not necessarily eliminate, your clients’ benefits. Yet too many public employees believe the amount left over is immaterial, and therefore fail to follow up.
The Takeaway: Our new research, published in the Journal of Retirement, finds that benefits claimed from jobs prior to, or immediately after, the position with the public pension can add up to tens of thousands of extra dollars over the course of a person’s retirement.
… and finally …
1) Focus of the 401(k)
The demise of defined benefit plans makes the hyper-focus by workers on their 401(k)s understandable but doesn’t make it right. Clinging to the tax code provision like a seat cushion after a water landing obscures the bigger picture. Think about the length and consistency of a client’s Social Security contributions versus those to their 401(k). They began with the former the day they were hired for their first job, while they started the latter hopefully (hopefully!) by age 25—and probably suspended contributions at some point along the way. They’ll therefore receive more from Social Security, but they’ll also believe it’s a foregone conclusion their default claiming strategy will be correct. Nothing can be further from the truth.
The Takeaway: As we’ve said before and will say (over and over) again, Social Security is the largest financial decision in retirement for the majority of Americans. It is therefore imperative for advisors to dispel myths, raise seemingly contrarian views and ensure their clients have thoroughly vetted each and every possible claiming strategy. It’s something on which the success of their retirement—and increasingly the advisor’s business—depend.