Advisers need to monitor the
political landscape and develop backup plans
A new survey
underscores how important Social Security benefits are to older clients and
shows many advisory clients fear that their lifestyles could be seriously
curtailed if benefits were cut in the future as a result of the program's
long-term financing challenges.
The American
College of Financial Services surveyed 245 financial advisers with the
Retirement Income Certified Professional designation regarding the financial
future of Social Security and how it might affect their clients. The RICP
designation provides comprehensive instruction on building tax-efficient
retirement income plans, evaluating retirement risks and optimizing Social
Security and Medicare choices.
The Social Security
trust fund is expected to run dry in 2034 if
Congress fails to act before then. If that happens, there would only be enough
revenue from ongoing payroll taxes to pay about 80% of promised benefits, resulting
in a 20% across-the-board cut for all beneficiaries, according to the 2019 Social Security and Medicare Trustees' Report.
No one expects the
worst to happen, but Social Security reform will require bipartisan support,
and the sooner lawmakers tackle the problem, the better.
Two-thirds (67%) of
the RICP-holding financial advisers with older clients say their clients are
moderately worried that the Social Security program will drastically cut
benefits in the future, according to a new survey.
The advisers
themselves are less concerned about that possibility of Social Security
benefits cuts, with 46% saying they are worried and 54% saying they are not
worried.
However, if the
worst-case scenario did occur, the results could be devastating. More than
eight in 10 (84%) RICP-holding financial advisers with older clients agree that
cutting Social Security benefits by 20% today would drastically alter their
clients' lifestyles.
Wade Pfau, a
prominent retirement researcher affiliated with The American College, said he
was shocked that so many of the financial advisers thought their clients, who
tend to be wealthier than the average retiree, would be significantly affected
by potential Social Security cuts.
Although he expects
Congress to act in time to prevent benefit cuts, Mr. Pfau said the big unknown
is whether future Social Security benefits would be subject to means testing,
which could affect the bulk of advisory clients. Higher-income retirees already
pay income taxes on a portion of their Social Security benefits and are subject
to higher premiums for Medicare.
"These
concerns indicate that advisers need to monitor the political landscape to
ascertain whether Social Security benefits may be reduced in the future and
they need to work with their clients now to have plans in case cuts indeed
occur," Steve Parrish, co-director of The American College New York Life
Center for Retirement Income, said in a statement accompanying the survey
results.
The survey also
shows that RICP advisers believe that Social Security is still a good
investment.
"On average,
81% of advisers' clients are taking Social Security after age 65, with only 9% of their clients
taking it at the earliest age," said Colin Slabach,
assistant director for the college's retirement income center. "This is
drastically different from the national average, with 35% of men and 40% of
women claiming their benefits at the age of 62."
A separate study from
the Stanford Center on Longevity in collaboration with the Society of Actuaries
demonstrates the importance of maximizing Social Security benefits for the
majority of American retirees, particularly those with less than $1 million in
retirement savings.
The Spend Safely in
Retirement Strategy (SSiRS) that has been put forward by the two organizations
has two components. It calls for developing "retirement paychecks"
for life that are not subject to investment risks to cover basic living
expenses and using a portion of retirement savings each year to create
"retirement bonuses" to fund discretionary spending.
To implement the
strategy, retirees are encouraged to optimize their Social Security benefits
using a thoughtful delay strategy. If workers decide to retire before the
optimal age for starting Social Security benefits, the strategy suggests they
could use some of their retirement savings to fund a "Social Security
bridge payment." The retiree would set aside a "retirement transition
fund" that equals the total amount of the bridge payments that they expect
to withdraw before their actual Social Security benefits begin.
Another option is
for the worker to work part-time —
earning enough to replace the Social Security benefit that is being delayed and
thereby avoiding the need to set up a retirement transition fund and preserving
more retirement savings to generate future lifetime income.
The second step of
the strategy is to determine how to invest the retirement savings using
target-date or index funds and figure out how much to withdraw each year. The
IRS required minimum distribution formula can provide a good benchmark for
annual withdrawals.
While the Spend
Safely in Retirement strategy is designed for middle-income retirees to
implement on their own, financial advisers can use it as the basis for
retirement income plans, fine-tuning and customizing the details to suit
clients' investment and financial planning needs.
"It is an
academically optimal strategy that builds an income floor and allows a retiree
to spend an increasing percentage of savings each year, rather than the 4% rule
where you spend the same amount each year on an inflation-adjusted basis,"
said Mr. Pfau, who co-authored the Stanford/SOA study.
"It's a more
efficient way to spend down your assets — as long as you are not worried about
leaving a legacy," he said.
https://www.investmentnews.com/article/20190812/BLOG09/190819994/clients-worry-about-future-social-security-cuts
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