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Why Social Security Claiming Comes First in Retirement Planning

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What You Need to Know

  • The Social Security claiming decision should be one of the first decisions a retiree-to-be makes.
  • Advisors with Social Security expertise are in an excellent position to add value to their clients and increase referrals.
  • Holistic retirement planning examines not only investment accounts but also reverse mortgages, tax strategies, health care, long-term care and estate planning.

With the rise of more online, remote access to financial advice, including robo-advisors, there has also been increasing pressure from younger workers who want more than just investment advice. Financial professionals who see the value of providing a holistic approach to financial planning can set themselves apart by expanding their scope of services. 

The traditional financial advisory service of calculating optimal portfolio allocations and focusing on measurement of alpha (the return of an asset) and beta (an asset’s historic volatility) no longer provides sufficient personal value for many of today’s investors. 

Beyond alpha and beta, gamma is the term used by Morningstar academics to measure additional income realized as a result of holistic planning. Especially when providing holistic retirement financial planning, the variables involved in evaluating this type of comprehensive planning are numerous as retirees age.

In its 2013 study titled Alpha, Beta, and Now … Gamma, Morningstar quantified a 22.6% increase in retirement income using only five strategies: (1) total wealth (including Social Security), (2) withdrawal sequence strategy, (3) incorporation of additional income products, such as annuities, (4) tax-efficient decisions and (5) liability-relative asset allocation optimization. 

Morningstar did not examine all possible strategies, such as the long-term impact of Roth conversions when increasing taxes are expected, nor did they consider the use of the many home equity conversion mortgage (HECM) options such as reverse mortgage lines of credit. But the additional or increased retirement income can be significant when utilizing a holistic approach to retirement financial planning.

Starting With Social Security

As a registered Social Security analyst, I feel strongly that the Social Security claiming decision for a retiree-to-be should be one of the first decisions to make as they approach retirement. 

For financial planners looking to attract retirement-age clients, Social Security advice is perhaps the most nearly universal, nonthreatening and sought-after retirement financial topic. The financial consequences that result from helping workers understand and make a smart Social Security election decision are numerous.

First, as reported by Statista, in 2020, only 29% of Americans worked with a financial advisor, while 65 percent said that they didn’t have a financial representative. Nearly all Americans, however, will be eligible to collect Social Security. Looking for more clients and referrals? Become a Social Security expert and watch your popularity skyrocket!

Financial advisors who have Social Security expertise are in an excellent position to add value to their current clients, increase referrals and reach a large segment of the retiree demographic who may not yet work with a financial planner.

Second, in the same Statista article, giving retirement investment recommendations was the service financial advisors performed most often for retirees in 2019. Although investments are often considered only funds held in retirement and personal accounts, all assets must be included in a retirement plan.

Social Security must be considered a retirement asset. Given that the average monthly benefit payable in January 2022 will be almost $1,660 ($19,884 annual), a retiree living for another 25 years will collect over $497,000. Equity in homes is another hidden asset that can be tapped if needed. So, for many retirees, Social Security is their largest asset.

‘A Holistic Plan Is Whole’

As Lane Martinsen wrote in his article The True Meaning of Holistic Planning, “A holistic plan is whole” and “optimizes all of a client’s assets” in this phase of life. Furthermore, “the value of this type of plan is found in identifying strategies that enhance retirement efficiency over time.”

A holistic approach prepares people for retirement by examining the various elements that make up a client’s “total wealth framework,” not only investment accounts but also mortgages, tax strategies, health care, long-term care and estate planning.

One of the retirement income elements that affects sequencing of withdrawals from accounts is the required minimum distributions, RMDs, from individual and employer-sponsored retirement accounts including regular IRA, 401(k) and 403(b) accounts. The IRS has very specific rules about RMDs, and retirees cannot keep retirement funds in their accounts indefinitely. These distributions can create a significant increase in income, and therefore taxes, beginning at age 72.

Holistic retirement income planning can offer strategies to minimize taxation by coordinating the possible significant increase of Social Security income at age 70 and income generated from RMDs. These strategies can include planning for Roth conversions early in retirement and the use of retirement accounts to reduce RMD amounts and cover the income gap if claiming Social Security at age 70.

Retirement Decumulation Planning

In many ways, the financial planning associated with retirement years is very different from that needed as we move through our working lives. After decades of working hard, saving and investing to accumulate assets that can be used in retirement, the thought of using those assets is unnerving to many soon-to-be retirees.

Retirement financial planning requires proper management and decumulation considerations of the client’s total wealth framework in a holistic way. Perhaps the three most important goals are extending the life of portfolios, managing income taxes, and allocating funds for future unexpected health care and long-term care costs.

Showing clients how you can provide such an all-inclusive retirement financial road map builds their confidence in your abilities as a financial advisor.

As a financial planner working with clients before retirement, start by evaluating and repositioning their income-producing and growth-oriented accounts. Work toward their retirement goals by maintaining or increasing their standard of living and providing assurance that their finances are secure through their retirement years. Your clients will thank you.

Martha Shedden is the president and co-founder of the National Association of Registered Social Security Analysts (NARSSA), in which she leads the development of the education and training program for all registered Social Security analysts (RSSAs). As an RSSA and CRPC, she is a leading expert in the field of Social Security, has authored many articles and white papers, and has presented on the topic numerous times. She is also the host of a podcast, Social Security: Answers From the Experts. She is passionate about educating financial professionals and retirees on the details of Social Security income planning, the foundation and first step to creating a financially secure retirement plan. Follow Martha and NARSSA on LinkedIn.