Advisers, take note: If Social Security planning isn’t part of the firm’s practice, it is missing out.
Even after the recent changes to Social Security, analysis and optimization of the federal program can mean $100,000 or more for clients.
To be sure, the rule changes made things more complicated. Many advisers are struggling with how to integrate Social Security planning into their practices and client experiences.
Advisers need to be adept in two areas: how to assess and optimize Social Security and how to put Social Security-claiming strategies together with a client’s outside retirement savings. These two steps are Social Security “coordination,” and there are four reasons why such coordination is critical to giving advice and helping households in retirement.
1. Huge amount of money. Social Security is the largest asset most American retirees have. Typically, benefits will account for more than $1 million of cumulative income for a couple, and a good strategy can find an additional $100,000.
Yes, even after the rule changes, it is common that when adding up all the Social Security payments that a client will receive, it will be larger than their outside retirement savings. Make sure clients know that they should spend as much time analyzing their Social Security-claiming options as they spend analyzing their 401(k) balances.
Don’t cut a corner assessing claiming strategies, as more than 10,000 alternatives exist for an average couple, and it is easy to miss good options by not analyzing all the details. Many advisers miss big opportunities and open themselves up to risk by not evaluating all the alternatives that can add important income for clients.
2. Increase portfolio longevity. Advisers don’t need to be rocket scientists to understand that if they can create more Social Security income for clients, clients won’t need to drain as much of their retirement savings. Consequently, advisers then take less out of the portfolios that they manage for clients.
The impact of this element of “coordination” is profound. Research illustrates how optimizing Social Security can add as much as 10 years of longevity to a retiree’s portfolio. Since most Americans haven’t saved enough for retirement, simply understanding how maximizing Social Security can make client’s money last longer is a very important assessment to make.
3. Lumpy cash flow. A Social Security-claiming strategy can have different benefit amounts that change over time. Also, there can be elements of delay where no income is generated.
These income gaps and varying income levels result in “lumpy flows.” The implication is that additional income will be needed to fill these gaps and variations.
Almost everyone will claim Social Security, and understanding the cash flow topography of Social Security is critical to help generate the appropriate cash flow from client savings to meet spending needs.
4. Order of withdrawals. The Social Security-claiming strategy, whether optimized or not, has a huge implication on how clients should tap savings and investments.
My recent research with William Reichenstein of Baylor University showed that by varying the order of withdrawals we could find more than six years of added longevity for a client.
Remember, that the lumpy cash flow of Social Security requires advisers to fill in the gaps. That means they must figure out the right asset classes and investments to liquidate.
We showed by withdrawing from multiple taxable and tax-deferred accounts such as a 401(k) or individual retirement account together, we could add significantly more time over the standard withdrawal sequences of taking taxable money, then tax-deferred and finally tax-exempt savings.
Ironically, most Americans should withdraw their tax-deferred savings first while they delay Social Security. This strategy maximizes Social Security benefits and reduces Social Security taxes and required minimum distributions once the client starts benefits.
Although this general strategy may be best for mass-affluent clients and not high-net-worth clients, coordinating a Social Security strategy with a withdrawal sequence using multiple accounts is always better than what all financial planning software contains.
Putting it together
The four components above show that coordinating Social Security with a retirement income withdrawal strategy is critical.
Why? Simply put, advisers can make your clients’ money last longer every time.
By focusing on the right areas, advisers can make a huge difference. Ironically, all the key elements of coordination are controllable and can help clients make informed decisions.
Clients control when they start Social Security and the order in which they draw down assets. These elements handled in a coordinated fashion can result in a lot more money.
Coordination is a great, differentiating, value proposition for advisers in helping retirement clients and prospects.
American retirees are scared they will run out of money. By implementing the Social Security coordination components outlined here, advisers can get more for clients and make their money last longer.
This story is part of a 30-30 series on Social Security. It was originally published on Aug. 3.
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