As we all know, financial planning is not a “one-size-fits all” proposition. Financial professionals have several different factors to consider when working with their clients, and the bulk of these topics are very different from client to client based on their individual circumstances.
There is one thing that all clients have in common, however, and mistakes with not maximizing it can have profound effects on the rest of your client’s portfolio – potentially causing a negative domino effect that can put unwanted stress on different parts of their retirement strategy.
That unifying factor common to all Americans is, of course, Social Security. Although not always the most exciting topic, Social Security is a critical component of an overall retirement plan and the difference in a fully enhanced Social Security strategy can be profound (but more on that later).
For many, Social Security is an essential cornerstone of their retirement strategy (ideally managed in coordination with other retirement portfolio holdings) as well as a reliable source of future lifetime income to help pay their expenses in retirement. For wealthier clients, Social Security may not be as crucial for retirement income, but it could play a significant role in their legacy transfer plans as enhancing their strategy can provide additional cash flow that allows other assets to stay invested in the market and eventually be passed along to heirs. Regardless what end of the spectrum each client falls on, Social Security can affect everyone’s retirement strategy and should be a significant part of every long-term financial plan.
Yet, most clients don’t know enough about the topic and its complexity could be the reason why many financial professionals are reluctant to spend as much time as they should in discussing and enhancing their client’s Social Security strategy. This dynamic needs to change, and the sooner it happens, the better. But why is getting the most out of Social Security so important?
Building A Solid Foundation
First and foremost, fully leveraging Social Security is a relatively simple way to provide more flexibility and opportunity within your client’s portfolio.
Think of developing your client’s financial strategy like building a house. There are many components and options that go into the strategy before you have the finished structure, but if you don’t start by addressing the foundation, you may be limiting your opportunity for future expansion. By optimizing Social Security from the outset, you’re creating a larger foundation and giving your clients more flexibility to adjust their plan however necessary based on changing life circumstances.
Responding To A Challenging Environment
Another important factor in this discussion is the larger economic/market environment, and the effect it’s had on retirement for many Americans. The pandemic has undoubtedly wreaked unexpected havoc with many financial plans, mainly due to persistent market volatility that has people questioning their investment strategy, pulling money out of the market and potentially missing out on opportunities to make up for significant losses. Pulling back on investments can be dangerous as it could compound losses already experienced during the worst of the downturn, thereby potentially limiting chances of achieving retirement goals.
Also, consider rising unemployment. Many Americans are simply not prepared for a job loss that could spell an early end to their working years and have not adequately planned for a longer time spent in retirement. In fact, according to the 2020 Retirement Risk Readiness Study* from Allianz Life Insurance Company of North America (Allianz Life), half of all Americans said they retired earlier than expected, and most for reasons outside of their control, including unanticipated job loss (34%) and healthcare issues (25%). The COVID-19 pandemic certainly shines a brighter light on the idea that unforeseen circumstances can have a devastating effect on retirement savings if risk management and protection measures aren’t built into a portfolio.
Last but not least, is the search for yield in the current low interest rate environment. Low rates mean conservative financial vehicles may not be providing the type of returns that people can rely on, forcing them to take more risks and accept more exposure to the aforementioned volatile market or lower their current standard of living. While accepting more risk is OK for some who may have a longer time horizon to build assets, it can be a stressful endeavor for people who are relying on results from fixed investments to provide the necessary income for a retirement that could last 25-30 years or more.
Bottom line, these issues combine to make an already challenging situation for retirement savers even more daunting. Even for people that weren’t directly affected by these economic factors, they have no doubt been paying attention and are keen to avoid similar issues with their own portfolios in the future. Thankfully, Social Security is there to act as the reliable safety net to help ensure Americans have enough money to cover their fixed costs in retirement and set up the rest of their portfolio for success, right?
Not so fast.