The Social Security Statement as a Financial Planning Tool

Apr 28, 2021 / By Elaine Floyd, CFP®
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The Social Security statement can be one of your best financial planning tools. Regardless of a client’s age, it can lead to targeted conversations about life planning, financial planning, health insurance, investments, life insurance, tax planning and more. Here’s how to use it to best advantage with clients at every life stage.

Social Security statements rank right up there with tax returns and retirement account statements as the key documents you want to get from clients at the outset of your relationship. While Social Security statements seem straightforward and self-explanatory, they contain a number of important items that are not so obvious. The few moments you take to walk clients through their statement can pay off in a better understanding of their benefits and other actions they may need to take in preparation for retirement.

Before your meeting, have clients go to ssa.gov/myaccount to open an account. It’s easy and self-explanatory. If clients have placed a freeze on their credit file, they’ll need to temporarily lift the freeze to get the account opened. Also, in verifying their identity they’ll need to answer basic questions from their credit file, such as where they send their mortgage payment or where they have previously lived. Once the account is opened they can return to it anytime to see and download their latest Social Security statement.

These sample statements provided by SSA, grouped by age, suggest that Social Security counseling is not just for people on the brink of retirement. Younger people need to know that their FICA contributions essentially buy them membership into a national system that stands ready to help should they become unable to work due to age, disability or death.

Younger clients

When talking to younger people, aged 25–34, about Social Security, the focus should be on their earnings record. Show them where it appears, on page 3 of the statement, and explain that the more they earn over their working career, the higher their retirement benefit will be. Make sure they understand this connection between earnings and benefits.

The benefit estimate on page 1 assumes continued earnings at the same rate until retirement. If they are currently under the maximum wage base, increasing their earnings will raise their benefit and boost their overall financial security. Warn them that taking a long break from work or retiring early will lower the amount they’ll collect at retirement. Few young people take Social Security into account when making career choices—but they really should. The simple act of maximizing earnings—regardless of how they spend or invest those earnings while they’re working—will pay off at retirement.

As you’re looking at the earnings record, ask if it appears to be correct. Errors are rare, but they do happen. Help everyone get into the habit of checking their Social Security statement annually and verifying that the earnings are correct. And if they change jobs, make sure the employer has the correct Social Security number on file. This seems hardly worth mentioning, but it’s easy for numbers to get transposed in the shuffle of new employment papers, and if the employer reports earnings under an incorrect Social Security number, they will not be properly credited.

And finally, without undermining the importance of Social Security, reinforce the fact that it was never intended to meet all of a person’s expenses in retirement. On average, Social Security provides about 40% of the income a person will need in retirement. This is your entré into a more in-depth conversation about how to save and invest for the future.

Mid-career workers

Mid-career workers, aged 35–54, will have a longer earnings record, but with fewer years to go before retirement. The connection between earnings and benefits cannot be overstated at this point, especially if there are some low- or zero-earning years on their record. This is their chance to beef up their earnings if possible, through pay raises, promotions and strategic career moves. As always, check for errors on the earnings record.

Once you’ve reviewed the Social Security statement you can go on to talk about how they’re fixed for retirement. Have they thought about when they’d like to retire? Do they know how much they will need to retire? How much do they currently have in retirement plans? Is the money invested properly? Then move beyond the financial statements to explore their overall life goals.

Many people in this age group are experiencing burnout. They may be thinking about changing careers, going back to school, or even retiring uncommonly early. For someone contemplating a major life turnaround, Social Security is probably the last thing on their mind, but you owe it to them to remind them of that connection between earnings and retirement benefits. Maybe a sabbatical that allows them to recharge and recalibrate their career choices will be a good strategy in the long run, even if it does result in a zero or two on their earnings record.

Clients over 55

Workers 55 and older are prime candidates for your Social Security counseling skills. Whereas younger workers may need to be prodded into addressing Social Security (often thinking it won’t be there for them), older clients may now be initiating the discussion. Our surveys among financial advisors show that up to 70% of the baby boomers attending Social Security presentations are currently unadvised. With the bulk of their assets in employment-based retirement plans, they simply haven’t felt the need for a financial advisor—until they start looking at their Social Security claiming options and need someone to do the math and coordinate Social Security with the rest of their retirement income plan.

People now may be thinking seriously about retirement. If they have substantial retirement resources, why not retire early? Here again, you’ll have to draw the connection between earnings and benefits. If a client retires several years before full retirement age, their Social Security benefit could be as much as $200 less than the amount shown on their statement. Send them to the SSA Retirement Estimator, where they can project an earlier retirement date and get a revised estimate of their benefit. Also remind them that Medicare does not start until age 65; anyone planning on retiring before then will need to figure out another form of health insurance for themselves and their spouse, whether it be individual health insurance, coverage on a spouse’s plan, or retiree insurance if they are lucky enough to have it.

Starting around age 55 you can use the Horsesmouth Savvy Social Security Planning Calculators (if you are a member of the program) to estimate benefits under the various claiming scenarios. Keep in mind that the further away a client is from FRA, the less accurate the estimates will be. The statement estimate assumes the client will keep working at the same pay until claiming age. As part of your discussion, ask if that will be the case. If not, either knock $100–$200 off the statement estimate when entering the PIA into the calculator, or send the client to the Retirement Estimator for a more accurate estimate.

The statement now has a discussion of the WEP and GPO, warning people that if they will be receiving a pension from a job in which they did not pay into Social Security, their Social Security benefit may be lower than the amount shown on the statement. This should also be part of your conversation with clients, even if it’s just a quick check. The WEP and GPO affect only about 3% of Social Security recipients, but for those it does affect, preparation is vital in order for them to have a realistic idea of their retirement income.

The statement for people in this age category contains useful information relating to retirement, including information about the earnings test. It does a good job of explaining that while some benefits may be withheld if you are under FRA and work, the benefit will be recalculated at FRA to give credit for those months in which a check was withheld. The benefit might even be additionally raised due to the higher earnings.

If clients are under FRA and work, it’s better not to apply for Social Security because of the hassle of estimating earnings, having checks adjusted, and so on. As you’re going over the statement to find out if they plan to work and receive Social Security while under FRA. If so, explain how the earnings test works. The annual threshold for 2021 is $18,960.

The statement also explains retirement age considerations, including the fact that if you apply before FRA, your surviving spouse will receive a lower survivor benefit than if you wait until FRA or later to apply. As you know, showing the effect of claiming age on the survivor benefit is one of the key functions of Social Security planning. Understanding the first-year survivor benefit based on the higher-earning spouse’s claiming age not only informs client claiming decisions but may also lead to a discussion of life insurance or other vehicles designed to ensure sufficient income for the surviving spouse.

There is a Medicare reminder on the statement—that even if you wait to start Social Security, you should enroll in Medicare when you turn 65, otherwise you may not start right away and may have to pay a late-enrollment penalty. Of course, not everyone needs to enroll in Medicare at 65, if they are still working and covered by an employer plan that covers 20 or more employees. But this short Medicare reminder on the statement can lead to a broader, more personalized discussion about health insurance in the context of retirement.

The Social Security statement can be one of your best financial planning tools. Regardless of a client’s or prospect’s age, it can lead to targeted conversations about life planning, financial planning, health insurance, investments, life insurance, tax planning and more.

As director of retirement and life planning for Horsesmouth, Elaine Floyd helps advisors better serve their clients by understanding the practical and technical aspects of retirement income planning. A former wirehouse broker, she earned her CFP designation in 1986.

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