Bang the Gong About Social Security

Key points

• Financial advisors can add Social Security to the risks to retirement security—market uncertainty, inflation, longevity, and health—they already raise with clients.
• Financial planning tools, including those estimating future Social Security benefits, can help advisors address the risk and pivot to deeper conversations about retirement income.
• Surveys show clients expect their financial advisors to help them understand Social Security and how to maximize its benefits in their retirements.

The future of government entitlement programs is a perennial source of unease for anyone who benefits — or hopes to in the future. Financial advisors engaged in retirement income planning must address one entitlement program that almost universally affects their clients: Social Security.

The 2024 Annual Retirement Study from Allianz Life revealed that only 22% of Americans with a financial professional have talked to them about their worries concerning Social Security. Yet, most Gen Xers (73%) and Millennials (63%) expressed concern about their future Social Security benefits.

Perhaps advisors worry that raising the topic of potential reductions in Social Security benefits is a minefield they’d rather avoid. But as the Allianz Life survey shows, it’s on clients’ minds. They’re waiting for advisors to explain their options.

This isn’t about politics. It’s about retirement security. And it’s possible to keep the two a friendly distance apart.

The State of Social Security

According to the U.S. Government Accountability Office, the trust fund that pays Social Security old-age benefits has since 2010.

Official projections are that the program’s reserve funds will be exhausted in less than 10 years if Congress and the president take no action. If the situation doesn’t change, retirees in the future could receive only about 79% of their scheduled benefits, or a 21% reduction in what they anticipated.

I don’t raise this to shout, “Fire!” There are many proposals for addressing the anticipated shortfall. They include raising the full retirement age and increasing the payroll taxes on employers and workers that fund Social Security.

Given Americans’ overwhelming support for Social Security, reasonable people would conclude that lawmakers will address the funding crisis, just as they have in the past.

Nevertheless, as anyone in our business knows, hope is not a plan. We already talk with clients about the risks to secure retirement—longevity, ill health, inflation, and market fluctuations. We should add Social Security to that list and address it in financial planning.

First, Fill the Knowledge Gap

Many people (53%, according to the 2024 Allianz survey) have limited knowledge about Social Security. Advisors should explain several facts to clients well before they turn 62, the earliest age at which individuals can file for retirement benefits.

Given the uncertainty about benefit levels in the future, it’s wise to introduce the following Social Security basic facts to clients in their 40s and 50s and repeat them often in subsequent years:

• Filing at 62 means clients will have a reduced benefit for the rest of their lives. If they live long lives, that could cost them six figures in lost income.
• Full retirement age is when clients can receive their “primary insurance amount,” or PIA. For people born in 1960 or later, that age is 67. Filing earlier than 67 will reduce the benefit.
• Waiting to claim until after full retirement age up to age 70 adds about 8% a year to an individual’s benefit.

Most people benefit from delaying Social Security until 70, but only 10% did in 2022, according to the Bipartisan Policy Center. Financial necessity or limited life expectancy are undeniable reasons that some file earlier. But many still don’t understand or ignore the trade-off they are making in lifetime income.

Further, couples must be in sync on their Social Security and retirement plans because the rules (often misunderstood) around spousal and survivor benefits affect their income while both are alive and after one dies.

Many people are unaware that options are available to bridge the gap between retiring and claiming benefits. It’s an advisor’s job to point them out.

Thanks to Technology, Advisors Don’t Have to Be Social Security Experts

Some advisors are reluctant to appear inexpert in Social Security rules (there are more than —2,700), so they overlook the subject. However, clients want to know—even if they’re not asking.

• The Nationwide Retirement Institute®, in its 2023 annual Social Security survey, found that 3 in 4 respondents want to talk with a financial professional about using different income sources to delay filing until full retirement age.
• The survey also found that 4 in 5 said they would likely switch their financial professional if their current one couldn’t show them how to maximize their benefits.

If you’re a financial professional, is that a risk you want to take?

I’ve worked with hundreds of financial advisors who use Social Security+ for advisors or the enterprise version of Social Security+. The tools let an advisor play out as many “what if” scenarios with clients as desired:

• What if a spouse dies before claiming?
• What if one spouse lives to 78 and the other to 93?
• How are my lifetime earnings affected by taking a reduced benefit?

With Social Security+, dynamic timelines and charts adjust to illustrate for advisors and clients the effects of different filing ages and scenarios on their monthly, annual, and lifetime Social Security income.

Advisors can also contact to get answers to questions the tools don’t provide or complimentary consultation on client cases.

Advance the Retirement Income Discussion

Naturally, Social Security is but one leg of a retirement income plan. Social Security+ helps advisors pivot from claiming conversations to deeper ones about other income sources clients can expect in retirement, such as:

• 401(k)s, IRAs, and other tax-advantaged accounts
• Savings and brokerage accounts
• Inheritances
• Pensions
• Annuities and life insurance
• Real estate and other holdings
• And others.

With that information, advisors can begin to explore alternatives to plugging the gap between retirement and Social Security filing in an effort to maximize clients’ benefits and income over their lifetimes.

• Depending on their tax brackets and other considerations, a client or couple may find it more advantageous to use brokerage assets or retirement accounts for income and delay Social Security.
• Other clients may delay retirement slightly or consider working part-time or as a consultant for income to allow them to postpone Social Security claiming.
• Clients may ask advisors about other options, such as annuities, to help them maximize Social Security income.

Allianz Life offers financial professionals access to Social Security+ to help them have frank conversations about retirement income. Read our case study to find out more.

Nassau Financial Group has developed the Nassau Income Accelerator to help clients optimize Social Security, government or pension payouts. Social Security+ helps advisors illustrate how the product works with Social Security.

When—if—lawmakers address the Social Security funding crisis, any changes will likely be harder on Gen X and Millennial clients. As the Allianz Life survey showed, they know that, unlike their grandparents and parents, they need Plan B if Social Security benefits are reduced.

If I can help you, please contact me. I can demonstrate Social Security+ and discuss other solutions for helping clients achieve retirement security and peace of mind.

Services provided by SEI LifeYield, LLC, an unregulated subsidiary of SEI Investments Company (SEI). Neither SEI nor its affiliates provide tax advice. Please note that (i) any discussion of U.S. tax matters contained in this communication cannot be used by you for the purpose of avoiding tax penalties; (ii) this communication was written to support the promotion or marketing of the matters addressed herein; and (iii) you should seek advice based on your particular circumstances from an independent tax advisor.

Neither Allianz nor Nassau Financial Group is affiliated with SEI or its subsidiaries. This material does not constitute an endorsement or recommendation of their products and services.