Discussing Social Security with Clients

by Ryan W. Smith
Less than half of current retirees and near-retirees who expect to retire within a decade receive advice that includes Social Security in their retirement financial plans, according to a survey by the Nationwide Retirement Institute, part of Nationwide Financial. Of those that spoke with their advisor about Social Security, more than half of investors had to initiate the conversation themselves, typically well after they had begun to work with their advisor.
This puts an undue burden on retirement planning, say the report authors, because not accounting for Social Security benefits in retirement typically also means that healthcare expenses are being overlooked as well. Additional stress is then placed on retirement accounts because 62% of Social Security benefits are spent, on average, for healthcare.
Only 41% of current and near-retirees speak with their financial advisors about Social Security. The discussion is started 60% of the time by the investor or her spouse. Only 15% of these discussions occur during the initial meetings with the advisor, a significant decline from the recent past where, in 2014 and 2015, nearly 35% of initial discussions between advisors and investors involved the topic of Social Security.
Despite many studies showing large percentages of retirees and near-retirees being very worried about retirement income, many investors do not expect their advisor to speak to them about Social Security. People who have recently retired, by a 77% to 23% margin, do not expect Social Security to be part of their conversations with their financial advisors.
Investors who did speak with their financial advisors about Social Security tended to follow their advice. Only 2% of respondents did not follow their advisor’s recommendations on Social Security, with 39% saying they followed the advice completely, another 47% saying they mostly followed the advice and another 12% saying they would but hadn’t yet had the opportunity.
There are three main takeaways from the report’s conclusions regarding Social Security’s impact on the Client-Advisor relationship:
1) Clients are becoming more likely to switch Advisors if Social Security is not part of their financial plan
As more and more Americans rely on Social Security to provide their primary income in retirement, many are realizing that their financial plans need to include more on the subject. One thing that appears to have changed in the past few years, according to the report’s authors, is that more people who are already retired ask that Social Security be included in their financial plans, with 54% of those retired less than 10 years and 35% of those retired over a decade saying they felt that way. For those who plan to retire in the next decade, 76% of respondents said that they would switch advisors if Social Security was not part of their financial plan.
2) Many investors are not well informed about their Social Security benefits
Even with Social Security becoming a more important aspect of retirement plans, most Americans are not well informed about the program, including their own benefits. Nearly one-third (32%) of those who plan to retire in the next ten years are guessing or do not know what their benefit will be. Nearly one-quarter (22%) of recent retirees reported receiving less in Social Security than they had expected. Even those who had been retired over a decade overestimated their Social Security benefits, with 33% receiving less than they expected.
Benefits are not the only part of Social Security that Americans are not well-informed about. Many Americans do not know what expenses might be withheld from their Social Security benefits. For example, while 71% of those retired over a decade say that Medicare Part B is withheld from benefit payments, only 46% of future retirees say the same. Another 45% of future retirees say they don’t know what will be withheld or that nothing is held back from Social Security checks, compared to 19% of those retired longer than a decade and 29% of recent retirees.
3) Many Americans take Social Security earlier than they should
Social Security can first be available when a person reaches 62, with full benefits achieved at age 66 for those born before 1954. For those born after 1960, 67 is the “full” retirement age with 2 months added to age 66 for anyone born between 1954 and 1960.
What many Americans do not realize is that they can choose to wait to receive Social Security until age 70 and that for every year after “full” retirement, until age 70 is achieved, benefits increase by 8%. Those who take benefits early receive 25% less at 62 than they would at full retirement.
The report’s authors believe this is the main area where investment advisors can provide a benefit to their clients if they discuss Social Security. With the average lifespan nearing 79 years, the report’s authors conclude that by taking Social Security early, many Americans are depriving themselves of many thousands, sometimes hundreds of thousands, in retirement income.
About one-quarter of recent retirees, 23%, felt they had started to draw their Social Security too early. The lower benefits from earlier payments impacted nearly one-third of retirees, both recent and those retired over a decade, 28% and 23% respectively, said that health care expenses have interfered with the retirement they had expected.
These types of situations are where financial advisors can provide necessary, and welcome, assistance to their clients. If health care expenses are much higher than expected, perhaps drawing down an IRA is a better way to cover the cost than taking Social Security early.
Financial advisors who look at Social Security as part of a financial plan are more likely to retain clients, more likely to provide a value-add for their clients and most likely to assist their clients in maximizing income, reducing expenses and making retirement as enjoyable as possible for their clients.