How great a role should Social Security play in your clients’ retirement income plans? And just as importantly, how should its collection be coordinated with retirement account distributions and other income streams?
Nationwide Retirement Institute research shows that recent and future retirees expect the program to provide 57 percent of their income. And considering that the average annual payout is just under $17,000, that may be a decent estimate for a married couple with shared expenses and a paid-off home.
For many seniors, however, that estimate is just a guess. Most recent and soon-to-be retirees haven’t received any Social Security help from their advisors, and among those who did receive advice, over half had to initiate the discussion themselves. What’s more, 45 percent of future retirees don’t understand what expenses will be withheld from their benefits, and at least half don’t understand how their monthly benefits are determined.
Clearly, these clients can use your help.
“Lower and middle-income people tend to use Social Security as a crutch, while those with higher net worth don’t think about the total benefits they can receive,” says Carrie Turcotte, Partner and Wealth Management Advisor at Wells Fargo Advisors.
As a significant guaranteed income stream, properly timed Social Security distributions can help your clients cover their costs and make the most of other assets and income streams. By properly placing it within their broader retirement pictures, you can provide lasting peace of mind while helping them to achieve their retirement goals.
Expenses in retirement
According to the Social Security Administration, 48 percent of married couples receive at least half of their income from Social Security, with 21 percent relying on the program for 90 percent or more. The SSA also recommends that benefits replace about 40 percent of income for average earners (more for low earners and less for high-income families).
For most clients, however, an honest look at expenses is more important than any statistic or rule of thumb – an essential starting point for allocating Social Security and determining a realistic standard of living.
“You’ll often hear that you can live on 70 to 80 percent of your previous income when you retire, but it really depends on your situation,” says Barry S. Waronker, JD, Senior Partner and CEO of Informed Family Financial Services.
Specifics vary from one family to the next, but clients can rest easy if they understand a couple of key points. First, they’ll have a great deal of cash freed up now that they’re no longer saving. Second, the first few years of retirement won’t be indicative of their long-term income needs.
“There are go-go, slow-go and no-go years,” says Waronker. “Oftentimes, people need to build up more income up front, but as they get into their 70s and 80s, they slow way down on spending.”
Covering needs with Social Security
Instead of considering Social Security in proportion to a client’s overall portfolio, it makes more sense to separate it completely, treating it as the safety net it was designed to be.
“Social Security and other safe sources should be the base of your income – especially given the unpredictability of the stock market,” says Waronker. “That lets you feel safe and have a consistent paycheck, with money left over for vacations, gifts and other extras.”
With the average retirement costing around $750,000 and lasting just under 20 years, Social Security may cover the bare bones for middle-class clients. But wealthier retirees with higher standards of living will likely need additional income from pensions, lifetime annuities and other guaranteed sources.
There’s another benefit to treating Social Security as an income stream, rather than an asset: “It can make people less aggressive or less reliant on equity returns to meet their needs,” says Ben Westerman, Senior Vice President of HM Capital Management. With their needs met through guaranteed income, clients can allocate their riskier investments to luxuries, inheritances and longer-term goals that can better withstand market corrections.
Timing and tax reductions