Like any good advisor, you keep up with economic news, subscribe to investment insights, analyze portfolio performance, stay abreast of the latest tax laws and much more. Staying informed about these and other findings is an important part of helping your clients build a solid retirement strategy.
Meanwhile, sitting quietly in the background is potentially one of the highest yielding opportunities available to them, a reliable and considerable stream of income that’s guaranteed for life, one that could mean the difference between making a huge mistake and making ends meet.
It’s not glamorous, nor is it the next shiny object that might capture your client’s attention. But it’s a powerful and potentially significant future income stream that is worth focusing more attention on when talking with clients.
Not sure how to frame the conversation? Use these tips to get started.
Determine Fixed Costs
It’s a standard question, but asking your clients whether they’ve listed out what they spend their money on shouldn’t be glanced over in anticipation of getting to more “important” matters. Some clients may not have a monthly budget or know how much they spend on fixed costs like utilities, food, housing, transportation and other expenses. Don’t settle for a “best guess.” If they haven’t calculated those costs, strongly encourage them to complete the task.
Providing a simple budget worksheet might help them take the necessary steps to identify their fixed costs and discretionary spending. Understanding their base, or “floor,” is a critical part in determining the minimum amount they will need to make ends meet in retirement. Some may be surprised to discover what they really spend their money on and may even consider ways to trim discretionary spending to help them transition some of that money toward retirement instead.
Maximize Social Security Benefits
Once they’ve determined their monthly expenses, simply ask, “Will your projected Social Security benefit be enough to maintain your current lifestyle?” Chances are, there may be a gap, which may be one reason they’ve come to you for help. Currently, the average monthly benefit for retirees is just over $1,500.1 As you know, if your client begins claiming Social Security before reaching full retirement age, they will see a reduction in potential benefits.
Talking about Social Security with clients may not seem as intriguing as discussing the latest diversification strategies. After all, Social Security benefits are, for the most part, stable and aren’t susceptible to market volatility like some other retirement income sources.
In addition to strategizing how to get as much as possible from portfolio investments, advisors also need to strategize ways to get as much as possible from Social Security for their clients. Yet, some spend too little time on this aspect of retirement planning.
Imagine telling a client who wishes to retire at age 62 that they could receive a 76% increase in their monthly income. Who wouldn’t want those kinds of guarantees or returns, especially in today’s volatile markets? According to the Social Security Administration’s example, that’s what they can expect if they wait until age 70 to begin claiming benefits. A 62-year-old claimant receiving $716 could have earned $1,266 if they waited until age 70 — $550 more each month!2
Such a potentially significant and safe share of an investor’s monthly income is nothing to rush through when discussing their retirement strategy. Take time to examine the role of Social Security and stress the importance of maximizing benefits when possible.
Establishing a Bridge Fund and Supplemental Income
In an ideal scenario, your client’s fixed monthly expenses in retirement would be covered by their Social Security benefits, and their investment portfolio would help fund the fun things in life. Knowing they have a set source of income that isn’t threatened by economic uncertainties may result in a higher risk tolerance, enabling them to invest more aggressively elsewhere.
However, you likely have clients who, for various reasons, simply will not or cannot wait until full retirement age to leave the workforce. Whether by their own choice or due to downsizing, some investors consider taking Social Security early.
If you’ve been having conversations with your client about how to leverage the full benefits of Social Security throughout your relationship, they may be more likely to reach out to you for guidance, in which case, you can propose investment options that may provide supplemental income and potentially prolong their filing period to increase their benefits.
For clients with higher earnings who want to maintain the same standard of living in retirement, the “floor” income that Social Security provides may not be enough, even if they wait until full retirement age. In these cases, a deferred income or immediate annuity may be an ideal way to bridge the gap, providing a guaranteed income stream.
Other investment options may also serve as a transition fund to help cover expenses between retirement and when they claim Social Security, including mutual funds or a stable value fund for 401(k) investors. Even if they’re only able to delay claiming benefits by a year or two, it may still help bring greater “returns” down the road in the form of increased monthly Social Security payments.
Many older Americans fear running out of money as they age. When clients come to you for financial guidance and strategic advice, Social Security might not be a topic they expect to focus on, but maybe it should be.
Help them navigate their retirement journey with the facts about Social Security and other factors that may influence the road ahead. Share our infographic with them, Start Your Retirement Journey With a Full Tank, to help them understand the importance of not running out of money. Simply click the link below.
1Social Security Administration, Monthly Statistical Snapshot, August 2020, September 2020.
2Social Security Administration, When to Start Receiving Retirement Benefits, 2020.