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Retirement Planning > Social Security

Unclaimed Cash: Why Social Security Planning Can’t Be Ignored by Advisors

By Melanie Waddell

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Many advisors would agree that helping clients optimize their Social Security benefits is an integral part of retirement income planning, but a surprising number of advisors have not latched on to this important trend. Advisors who fail to incorporate — and become educated on — the myriad Social Security claiming strategies are not only at risk of losing clients, but they’re also putting clients’ retirement security in jeopardy, which could land them in legal hot water.

Actions to rein in entitlement programs by the GOP-controlled Congress could further obscure the already complicated process of optimizing clients’ Social Security benefits.

“If you select the wrong Social Security claiming strategy for your client, it’s irrevocable,” said William Meyer, founder and managing principal of Social Security Solutions.

Indeed, failing to recommend the right strategy for a client could leave a gaping hole in retirement benefits over a client’s lifetime. “The average advisor’s client is getting $1 million out of Social Security” during the course of their retirement, he said. “It’s their largest asset.”

Marguerita Cheng, CEO of Blue Ocean Global Wealth Management in Potomac, Maryland, agreed that Social Security “is a valuable asset, not simply a monthly check.”

Social Security optimization “is a great value add for clients and is a must for anyone doing comprehensive financial planning,” agreed Tara Scottino, an advisor with True North Advisors in Dallas. “Most clients do not have any idea of the number of choices they have or how to go about making a decision,” she said, adding that “there is a science behind choosing the correct timing for taking benefits, and, in many cases, once you’ve made a decision, there is no going back.”

Fine, but Do I Have a Legal Obligation?

While a good number of advisors are taking (or teaching) Social Security courses or using software to help determine which claiming strategy is best suited for a client’s unique situation, there’s a brewing debate over whether advisors are under a fiduciary or legal obligation to ensure clients choose the best Social Security claiming option.

Marcia Wagner, founder of the Wagner Law Group, who specializes in the Employee Retirement Income Security Act (ERISA), said that advisors should consider such discussions a “best practice,” and argued that it’s “expected that a good financial advisor who wants to add value” would talk to clients about the various Social Security claiming techniques.

For “a lot of people, one of their primary benefits to live on in retirement isn’t the assets that they’ve saved; rather it’s the ‘uber DB plan’ that the government has created—and to which [clients] have contributed their whole lives—known as Social Security,” she said.

While Social Security advice is not governed by ERISA, as it’s a government program, advisors “can be sued for professional negligence,” added Fred Reish, partner and chairman of the financial services ERISA team at Drinker Biddle & Reath in Los Angeles. “There is not, at least at this time, any duty on RIAs to give Social Security advice. And both RIAs and attorneys can define the scope of their engagements in their agreements” with clients.

However, for “financial planners (many of whom are RIAs), there might be an implication that if the agreement didn’t exclude Social Security advice (or if it were silent on the subject), then the financial planner would have a duty to properly and reasonably include the Social Security benefits (and the claiming of benefits) in his or her advice and recommendations.”

Meyer argued that his firm has already heard from consumers who are exploring litigation based on “bad” Social Security advice that they’ve received. “It’s only a matter of time before a case is made and precedent is set,” he said, adding that under a fiduciary duty, advisors must provide clients with the “best” possible advice.

With Social Security being the largest retirement asset for most Americans, the “best possible advice,” Meyer said, “must include Social Security claiming strategies, especially when an optimal strategy could mean hundreds of thousands [of dollars] more for a client.”

The Social Security advice area could be a ripe one for litigation, agreed Wagner. “I believe […] you will have plaintiffs’ lawyers with a case.”

Stephen Saxon, chairman of Groom Law Group in Washington, which specializes in employee benefits, noted that “the universe of services that advisors and wealth management professionals are being expected to provide is changing.” If advisors “want to be competitive, [they] may need to take into account the Social Security benefit and how [to] maximize it.”

“If an advisor has a contract with a plan sponsor or participant that says the professional advice they give is fiduciary in nature and it includes looking at sources of income, including Social Security,” Saxon said, “then I would submit it would be very difficult for you to wiggle out of that obligation.” So, Saxon warned, advisors should “be careful about having open-ended, generic statements” in their agreements.

Determining the Best Strategy

So how are advisors helping clients decide which claiming strategy best meets their needs?

As Meyer explained, picking the optimal Social Security claiming route is “really a complicated decision,” and the “number of rules and exceptions [is] daunting.” Advisors “really have to be careful,” as Social Security claiming strategies are dependent on different variables such as life expectancy, household type or whether clients work part-time. Then there are rules for receiving disability benefits (see sidebar, “The Third Rail of American Politics Is Live“), as well as rules for those of retirement age who have young children.

Different claiming strategies are based on household type—single, married or widowed. Also, “if one person has already started taking benefits, what should the other person do?” Meyer said that “happens a lot with married couples.” Different rules also exist for those who’ve worked in the government or have been a teacher, called the non-covered pension, he said.

Meyer said that while advisors know Social Security optimization “makes a difference, in some cases hundreds of thousands of dollars,” what they have yet to master is coordinating Social Security with a client’s withdrawal strategy (see sidebar, “While Waiting for SS Benefits, Whither Retirement Income?“).

Most retirees—anywhere from 70% to 80%—claim benefits early, at age 62, which most advisors say should be avoided. When taking benefits before your full retirement age of either 66 or 67, depending on when you were born, your benefit is reduced by 25%, said Scottino. If you delay your benefits and take them after 66, she explained, the benefit grows inflation-adjusted about 8% per year between ages 66 and 70.

According to the Social Security Administration, if a person starts retirement benefits at age 62, their monthly benefit amount is reduced by about 30% below what they would receive if they started benefits at full retirement age. If they start benefits at age 63, benefits are reduced by about 25%; 64, about 20%; 65, about 13.3%; and 66, about 6.7%.

For those who start receiving a spouse’s benefits at age 62, their monthly benefit amount is reduced to about 32.5% of the amount their spouse would receive if his or her benefits started at full retirement age.

“There is still the mentality that you should claim at 62 because Social Security is not going to be there,” said Michael Baker, manager and founding member of Vertex Capital Advisors in Charlotte, North Carolina. “That’s one of the worst reasons to claim at 62.”

Regardless of the situation, for married or divorced couples, and widows or widowers, “the value comes from waiting longer,” agreed David Mendels, director of planning at Creative Financial Concepts in New York. “For most people, [delaying taking benefits] makes a huge difference because [Social Security is] a safety net; even for relatively wealthy clients [it's] still a very significant part of their retirement” income.

Couples have “many more options” than single people, said Victoria Fillet, principal at Blueprint Financial Planning in Hoboken, New Jersey. “If you’re single, you have three options: take reduced benefits at the age of 62, take full retirement benefits at 66 or delay benefits until age 70, but even if you’re single at full retirement age, you should file and suspend.” That means going to the Social Security office and stating that you’re of full retirement age, but that you’re not going to start taking benefits until later.

If something changes, Fillet said you can go back six months after you suspend.

Say you’re single and decide to wait until 70 to collect benefits, but six months later you’re diagnosed with terminal cancer and you need to collect benefits due to your illness, Fillet explained. If you had done a file-and-suspend, the Social Security Administration “would go back six months” on the benefits you receive, meaning you’d get retroactive payments.

A file-and-suspend strategy also “opens up the benefit for people who are already on your record. Sometimes that’s your spouse, other dependents or children,” planner Scottino said.

She recalled a claiming strategy in which she “dug deeper” to help a widower. In this instance, the husband claimed under the spousal benefit and started receiving his deceased wife’s Social Security payout, which was between $900 and $1,000 per month, but he kept working until age 70. Working until 70 allowed his benefits to grow, and once he reached 70, “we flipped him over” to his full benefit, which was $2,000 per month. “Basically the $1,000 was free [money] while his [benefit] grew 8% per year for the last four years,” she said.

Addressing the Issue in Time

Tia Lee of Spectrum Management Group in Indianapolis said that “on or before our clients turn age 62, we provide them with a Social Security claiming strategy analysis,” since having these discussions “long before full retirement age allows time to prepare for the best claiming strategy.” The client, she said, “can plan what assets will be used to fill in the gap, if they choose to delay, [and which] are most likely to follow through with the best strategy. They also have a full understanding of the benefits available if they choose to change course.”

Like other advisors, Lee said Spectrum uses a software program to help demonstrate the various claiming options.

BlackRock has a Social Security calculator and MoneyGuidePro offers a module on Social Security claiming strategies. But Meyer argued that Social Security Solutions’ SSAnalyzer tool, which the company developed over three years and then patented, provides the only true “optimization” tool. “We have a who’s who of institutions using this software,” he said, adding that advisors who use SSAnalyzer software can private-label it.

Baker of Vertex Capital Advisors, who uses the SSAnalyzer software, said that he’s “shocked” by the number of people he talks to who are working with some type of financial professional, be it a “portfolio manager or an insurance advisor,” who aren’t providing Social Security advice. “We have people with multi-million dollar portfolios who are working with people to manage their money, but do not advise on Social Security. That’s a shock because it’s such an easy way to really add value to the client relationship.”

Baker said that people as young as 56 are asking his firm, which teaches a course about Social Security at the University of North Carolina in Charlotte, about their Social Security claiming options. “A good benchmark for me is to start talking to clients about Social Security a good three to four years before eligibility. At that point, there still may be adjustments they could make before they reach their early claiming age at 62.”

For couples that he works with, Baker said his goal “is to have the highest Social Security benefit deferred for as long as I possibly can—that’s my survivor benefit for the couple. That [higher amount] will be the benefit that will persist for as long as either one of them is here. If I can defer that benefit as long as I can, whether or not I get to mix in another file-and-suspend or some spousal claiming strategy, which would be even better, my goal is to get that benefit even higher because at the death of her spouse, I’m going to lose my lower benefit.”

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