Advisors who can produce a detailed Social Security analysis and have an active conversation with their clients are more likely to cement the relationship, said Chuck DiVencenzo, vice president of advanced markets at Allianz Life Insurance Company of North America.
But to do so, advisors need to do more than simply explain to clients the benefits of waiting until age 70 to take Social Security, DiVencenzo said. Advisors should understand their client’s needs, wants and interest in leaving a legacy and how Social Security may play a role in that analysis.
He spoke at the Wealth Advisor Forum in Chicago on Monday.
When discussing a client’s needs, DiVencenzo said, create an income stability ratio, which is the stable income they receive (Social Security, pensions, annuities) divided by their needed income. Say the stable income is $45,000, but the retiree needs $100,000 to live on annually. The stability ratio is 45 percent. The greater the ratio, the less affected their income will be by market risks. Ask them the question, “are you comfortable with this? Their answer is their risk tolerance,” he said, and it will give the advisor greater flexibility to take care of what the client wants, which helps secure the relationship.
Full retirement age right now is 66.4 months, and for people born after 1960, it is 67 years. While many advisors understand that delaying retirement each year after full retirement age can increase their client's Social Security benefit by 8 percent, many clients want to claim it as early as 62.
To counter that tendency, advisors should show the difference in present value and total income when married clients both file at 62 versus 70. For those who both file at 62, they will receive a present value at a 4 percent annual return of $560,687, for a total income of $918,954 after 28 years in retirement. Married clients who file when the primary wage-earner files at 70 and spouse at 62 will receive $612,186, for a total income of $1.187 million after 28 years in retirement.
Some clients may want to claim Social Security at age 62, but then might consider going back to work. If working is going to be part of their income, they need to understand the penalties they may incur because of this. “If you have clients that work in 2018, their early retirement benefits are reduced further,” he said.
For every two dollars a client makes over $17,040, their benefits are reduced by $1 if they haven’t hit full retirement age yet. After they reach full retirement age, there is no reduction.
Clients might supply the advisor with Social Security information. Instead, get the information on Social Security from the government because that will give you additional information on their income in relation to what they are spending. Are they spending all of their income? That will help advisors understand how to balance needs and wants.
Many clients will likely have other assets to contribute to retirement, like 401(k)s and IRAs. Query what’s more important to them: having a higher asset value early or additional stable income in later years? This gives the advisor a better sense of how to structure Social Security, and when and how much to tap assets like IRAs, he said.