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How advisors can help clients make the right decisions

The statistics are staggering. An estimated 96 percent of retirees are claiming Social Security at the wrong age, which one report translates to a collective loss of $3.4 trillion in potential retirement income, or an average of $111,000 in lost retirement income per household.¹

According to the study, “about 57 percent of retirees would build more wealth through their life if they waited to claim until they were 70 years old (when only 4 percent of retirees currently claim), while only 6.5 percent of retirees would have more wealth if they claimed prior to turning 64 (when over 70 percent of retirees currently claim benefits).”

Why the disconnect as to when to draw down on benefits? And how can financial advisors approach this topic with their clients and provide much-needed education?

Kurt Rossi, CFP and CEO of New Jersey-based Independent Wealth Management has several theories, ranging from emotional to practical, as to why retirees don’t access Social Security at the optimal time. More importantly, these reasons create an opportunity for advisors to initiate conversations with clients.

He notes that retirees often try to factor in when they might pass away, which is very unpredictable. By hedging mortality bets, they sometimes think the best option is to start withdrawing from Social Security as soon as possible.

“Secondly, I think some people have a certain amount of distrust in the long-term solvency of the Social Security system, including whether it will run out of money. This creates a mindset of ‘I’m going to enjoy it while it’s here.’”

There are also those who want to use the Social Security funds before tapping into their 401(k)s, because they are more personally connected to the latter, having worked throughout their lives to build it. Or those who are worried about more objective considerations, such as tax liabilities. 

However, it’s this intersection of emotions and financial common sense that creates the perfect opening for financial advisors.

“Social Security is confusing for consumers, which is a great opportunity for advisors to step in and demystify it,” says Rossi.

Tactical approaches for advisors in educating clients

At the time of retirement, consumers have been receiving Social Security statements for years. They probably have dabbled in benefits calculators or read books on claiming strategies. Advisors are uniquely positioned to simplify and explain options, says Rossi.

His approach involves giving clients tools to make informed decisions and overlaying real life on top of the in-the-weeds financial questions.

“It’s our job to help clients think less about money and more about living their retirement,” adding that he walks through the benefits of spending 401(k) money first, which will then defer the Social Security decision until later when it is more financially beneficial.

Though it’s key that advisors understand the numbers, Rossi adds that it’s critical that they incorporate behavioral financial aspects in the client discussions.

“It's important to pair analytics with the emotional side to drive the best client outcome.”

Another issue of improper benefits was disclosed in a recent Office of the Inspector General report, which found that the Social Security Administration (SSA) did not adequately inform widow(er) beneficiaries of their option to delay their application for retirement benefits, which would have made them eligible for a higher monthly amount.²

The findings estimate that SSA underpaid about $131.8 million to 9,224 beneficiaries who were age 70 and older, and that it will under pay an additional 1,899 beneficiaries who were under age 70 about $9.8 million (annually) beginning in the year they attain age 70.

Though the decision to claim benefits does rely on the claimant, the OIG directed SSA to have better controls in place to inform widow(er) beneficiaries of their option to delay their application for retirement benefits.  

Rossi adds that though SSA has an obligation to inform claimants, advisors are well aware of this issue and need to work directly with clients, especially when they are recently widowed.

“Advisors have a responsibility to help clients make the most of their lives,” says Rossi, “but they have to balance the numbers with sensitivity and compassion.”

He often takes his clients through a simple scenario when discussing how and when to access benefits such as Social Security or their 401(k).

He asks if money didn’t matter, what would you be doing differently in retirement?

“Their answer sets the tone for the planning process, and my job is to help them get as close to that outcome as possible using the options available to them.”

1. https://unitedincome.com/library/the-retirement-solution-hiding-in-plain-sight/

2. https://oig.ssa.gov/sites/default/files/audit/full/pdf/A-09-18-50559.pdf