There’s a huge disconnect between how most pre-retirees perceive Social Security and the importance actual retirees place on this benefit. For example, the average pre-retiree expects Social Security will replace 60% of their income, when in fact that number is closer to 46%, according to a 2020 survey by Nationwide Retirement Institute. And 80% of soon-to-retire workers are entering retirement without any specific strategy at all.
Yet, 74% of actual retirees would switch their financial professional in order to maximize their Social Security. What this says is there is a lot of room for financial advisors to show their worth, increase trust and build their relationships with their clients by addressing this critical component to retirement income—and addressing it thoroughly and early.
That was the advice of Aimee Johnson, a vice president at Allianz Life Insurance Company of North America with a specialty in retirement income strategies and managing risk in retirement, especially for women.
“There is a lack of clarity as to how social security is going to fit into their overall retirement income plan,” Johnson said today during a breakout session at FA’s Invest in Women conference. That lack of clarity even extends to workers not knowing when they would receive full retirement benefits, with only 20% guessing correcting, she said, adding that 73% thought they’d be eligible for full benefits much earlier and 7% thinking it would be later.
To cut through the misconceptions, Johnson suggests advisors follow a standard roadmap for getting these social security benefit numbers right: gathering accurate information, making the benefit calculations, analyzing the timing of benefits, considering how receiving benefits might impact other client assets, and making a full income assessment. Only after reviewing all this information with the client can the best decision about when and how to receive benefits be made.
“A critical element to this process is gathering accurate information,” Johnson said, and that begins with the Social Security Administration’s estimation of benefits. But that’s just the starting point.
“We always want to work from that full retirement benefit,” she continued. “But other things, like was there a prior marriage, are also important in figuring out the benefits your client might have access to. Gathering all that information is critical to navigating your client’s benefit.”
Understanding how that full retirement benefit is calculated can help an advisor answer the vast majority of questions clients will have, Johnson said. While word on the street says the benefit is calculated from the last 10 years of work, word on the street is wrong.
Instead, the benefit is pegged to the highest 35 years of earnings, indexed to today’s dollars. The average of those 35 annual incomes is the client’s primary insurance amount. For clients who did not work 35 years, zeroes are entered in their place. From there, it’s a simple calculation. Arrive at a monthly amount by adding those 35 incomes and dividing by 420, which is the number of months in 35 years. The first $996 of that amount is reduced by an adjustment percentage to 90%. From $997 to $6,002, the total is calculated with an adjustment percentage of 32%. Above $6,003, the adjustment percentage is 15%. And in 2021, the maximum benefit is $3,148.
And all that’s assuming the client has the full 40 credits needed to access their benefit. A recent change at the SSA could help clients who are seasonal workers, in that workers can qualify for their yearly benefit even if most of their work takes place during one or two quarters in a given year, Johnson said. “So if a client is a few credits short, maybe they only need to pick up a seasonal job to make up that credit shortfall.”