Imagine you’re planning a round-the-world cruise.
It won’t happen for a few years but you’re serious about going. One of the first things you do is figure out the cost. As the date draws closer, you nail down the exact amount of money you’ll need.
Now, imagine you’re a client who’s planning to retire, someday. Wouldn’t you do the same thing? Figure out how long it will last and exactly what it will take to keep you afloat during your retirement journey?
The truth is: Most Americans don’t. Even your clients might not make a serious effort to do such a thing, unless you insist.
In fact, in a recent survey covered by U.S. News & World Report, only 14% of pre-retirees knew what their Social Security payments were likely to be at retirement. That level of ignorance is scary.
Social Security benefits were never meant to be your clients’ only source of income in retirement. If your clients understand their benefits, that will help them plan confidently for retirement. And we know that having a plan is one of the key behaviors in achieving financial and emotional confidence.
Whether your clients will be trying to meet their needs with mutual funds, life insurance, annuities, or cash in a coffee can, they still should go through the same kind of planning process.
Helping clients be strategic about their overall retirement income plan is one way to make them more financially and emotionally confident.
The 75% rule.
Your clients need about 75% of their pre-retirement earnings to live comfortably in retirement.
If your client earns $76,000 a year, for example, the client will need retirement income of $57,000.
Social Security will only cover part; about $32,000 a year will have to come from other sources.
And, even though the 75% rule may be a ‘rule of thumb,’ it may not be realistic. A team at the Society of Actuaries predicts that typical retirees will spend 100% of pre-retirement income during their first 10 years in retirement.
Tips for Clients
So, what do you tell your clients?
Here are four basic tips.
1. Wait if you can.
While there is no “right time” to retire, the age when your clients activate their benefits makes a big difference.
If a client was born between 1943 and 1954 and applies for Social Security benefits at age 62, the client will receive about $1,000 less per month than if the client waits until age 70. But, if a client decides to delay taking Social Security and also quits working, the client will need to have other retirement assets and streams of retirement income to pay the bills.
2. Get real numbers.
Calculating Social Security benefits is complex. Clients should use an estimator (or a tool you provide) to calculate their Social Security income.
3. Factor in health care costs.
Medicare premiums and health care costs keep rising. A married couple, both age 65 in 2020, may need up to $365,000 over retirement just to cover health care.
4. Recognize that there are no true guarantees.
Make sure that clients recognize how much of a strain the mass migration of baby boomers out of the workforce is putting on the Social Security program. Payout may only be 77 cents for each dollar of scheduled benefits by 2033. All the more reason for clients to plan for alternative sources of income!
There are other practical things your clients can do. The clients can limit their dependence on Social Security earnings in retirement planning by increasing retirement contributions to both their IRAs and 401(k)s. They should set up automatic deductions if possible.
Clients should also estimate their retirement expenses now and calculate them out 30 years to see what a long retirement will cost. They could also stay on top of rising medical expenses by building up assets in a health savings account (HSA).
And, of course, they will need to depend on you, and any additional advisors they have, to help them adjust to any changes in rules, programs and underlying economic conditions.
But fully understanding clients’ financial personas can help your clients plan for a retirement in a way that involves having more than one egg in the nest.
—Read 2018 Social Security COLA to Be Wiped Out by Medicare Premium Hike on ThinkAdvisor.