When you conduct a portfolio review, it’s common practice to factor in investments held outside your firm to help determine your client’s projected income in retirement. In addition to disbursements from an employer 401(k), a pension or other income-generating ventures like rental property, Social Security stands out as a reliable source of future income.
A major concern you’ve likely heard from clients is whether they’ll run out of money in retirement. While Social Security can provide a base income to cover fixed costs like insurance, utilities, food and housing, it may fall short, especially for those who’ve come to expect a certain standard of living. If those individuals also missed out on opportunities to build savings and invest during their working years, the chasm widens.
Recent market volatility is of concern to many approaching retirement age, causing them to wonder if their investment accounts will help them cover any shortfalls or pay for future discretionary spending such as travel or hobbies. If that sounds like some of your clients, you may want to discuss the following.
Social Security as a Foundation
As it stands today, Social Security will provide a guaranteed income for many of your clients, serving as a reliable foundation for fixed costs. That “base” income can vary significantly depending on the age at which your clients choose to claim benefits.
Framing your conversation around a strategy that allows your client to receive as much Social Security income as possible is important. Even though a typical retiree can claim Social Security as early as age 62, strategizing ways to delay claiming benefits until age 70 could increase their monthly income by approximately 76%!1
For example, a client who might receive $716 per month at age 62 would receive a $1,266 monthly payment if they wait until age 70. The $550 income difference per month is likely to raise eyebrows, and the 76% increased benefit during that time period may be appealing, especially in light of recent market volatility.1
Supplementing Social Security
Some of your clients may be able to bridge the gap between age 62 and 70 to help them delay taking Social Security benefits early to maximize their benefits. Of course, continuing to work is an obvious choice. Relying on income from rental properties or part-time work may also be an option. Additionally, passive income from dividends or business income may provide enough to get by. Some of these options require forethought and investing up front, though, and may be a luxury some older investors don’t have.
Encouraging a fully diversified investment portfolio as part of a long-term strategy may serve as a vehicle that allows your clients to bridge the gap, should they choose to transition from the workforce prior to full retirement age without immediately claiming Social Security benefits. In these cases, you may want to explore whether taking distributions from traditional or Roth IRAs is practical. Withdrawals of earnings prior to age 59½, however, may come with penalties and tax implications.2
Liquid savings and withdrawals from these types of investments can also serve to supplement Social Security for those who choose to claim benefits before age 70, helping investors enjoy their retirement years more fully.
Guaranteed Income Helps Bring Relief
Social Security, in essence, provides a monthly “paycheck” with a guaranteed floor based on when a retiree begins claiming benefits, and those benefits can’t be outlived. In addition to providing a fixed base income, they’re shielded from market volatility.
Many of those attributes are similar to another type of protected income that can be considered as part of a diversified portfolio: annuities. While there are many types of annuities you can recommend, income annuities in particular may be appealing to those who want to create their own pension, achieve guaranteed income and fill in the gaps that Social Security might not cover.
With guaranteed income from an annuity, you can help clients feel confident that they won’t outlive their savings. Some annuities have customized options that allow them to opt for flexible payment types and offer ways to protect beneficiaries. They may also benefit from market growth and be able to establish a guaranteed floor that helps limit losses, as with our Zone IncomeTM Annuity.
Your clients who are approaching retirement age may wonder how big of a role Social Security plays in their financial strategy, and may have lots of other questions, too. Help them identify where potential gaps may occur and develop goals together.
The Social Security Administration website is an exhaustive resource that can help them calculate their expected benefits, but it may feel overwhelming and difficult to navigate. It may be easier to start off by sharing our Answers to Common Social Security Questions client guide with them. It’s a great conversation starter and can help clear up some confusion. Access the guide below.
1Social Security Administration, When to Start Receiving Retirement Benefits, January 2020
2IRS, Traditional and Roth IRAs, January 28, 2020