When to claim Social Security retirement benefits is one of the most important financial decisions an individual can make. Although the majority of retirees would like guidance from the Social Security Administration (SSA) on the best time to claim benefits, the agency is no longer in the business of giving advice.
That creates a great opportunity for financial advisers.
In the past, SSA claims representatives used a breakeven point comparison to inform potential claimants about how long it would take to recover benefits foregone at an earlier claiming age compared to waiting until a later age to collect a larger benefit. SSA discontinued this practice in 2008 “because the computation did not consider the changes in life expectancy, mortality rates and the personal factors that the claimant should evaluate when making benefit decisions,” according to the agency's Program Operations Manual System (POMS).
In addition, traditional breakeven analysis does not take into account the current low-interest rate environment. Retirees who postpone claiming Social Security benefits beyond their full retirement age up to age 70 increase their benefits by 8% per year, potentially boosting their future inflation-adjusted benefits by 32%. No other low-risk investment can compete with an 8% annual return in today's near-zero interest rate environment.
Increasingly, clients are looking to their advisers for help deciding when they should claim Social Security and how that decision fits into a broader retirement income plan. In fact, 76% of future retirees said they are likely to switch financial advisers if their current adviser can't help maximize their Social Security benefits, according to a recent study by the Nationwide Retirement Institute. Only about a third of financial advisers have incorporated Social Security into their planning process, the Nationwide report found.
There are several Social Security software programs available to financial advisers with a wide range of costs depending on the level of service selected. Some offer ongoing training and help with complicated client scenarios.
The most popular programs and their annual costs include SS Analyzer ($300-$1,000); Social Security Pro ($295); Maximize My Social Security ($250); Social Security Choices ($240), and Social Security Maximizer ($0) and Nationwide's Social Security 360 Analyzer ($0). Most software providers that charge a subscription fee offer a free trial period.
But how is an adviser to know which Social Security benefit calculators is best for his or her practice?
Make sure the software program covers all of your potential client profiles including married couples, single and divorced individuals and widows and widowers. If your practice includes public sector employees who do not pay FICA payroll taxes, it is critical that any Social Security claiming tool you use can handle the Windfall Elimination Provision and Government Pension Offset rules that can reduce or wipe out potential Social Security benefits.
A new report from the SSA's Office of Retirement and Disability Policy reviews six free online tools for individuals who are trying to decide when to claim Social Security benefits. They include SSA's Retirement Estimator; the Consumer Financial Protection Bureau's Planning for Retirement; the Center for Retirement Research at Boston College's Target Your Retirement; AARP's Social Security Benefits Calculator; Financial Engine's Social Security Retirement Calculator; and Bankrate's Social Security Calculator. Although the report does not include the fee-based services available to financial advisers, the insights it offers about the other tools' underlying assumptions may help advisers better understand the software they use in their own practice.
“The calculators may be very informative for older workers who have an established earnings record, but less so for younger workers whose future earnings may be unpredictable,” the report found. “Users should understand that the benefit estimates produced by each tool are based on differing underlying assumptions which produce varying results even when the same inputs are entered.”
For example, some tools estimate the user's earnings history rather than using an individual's actual Social Security earnings record. Most assume an individual will continue to work and earn about the same amount in the future as was entered for last year and may use different inflation assumptions to calculate future earnings.
The Center for Retirement Research tool caps earnings at the 2009-2011 Social Security taxable maximum of $106,800, which is much lower than the actual taxable maximum of $118,500 for 2016. Bankrate's tool assumes only one spouse works and rounds the user's full retirement age to the next full year. For example, it assumes the full retirement age is 67, even though someone born in 1957 has a full retirement age of 66 and six months. Most tools display results in today's dollars but Bankrate uses future dollars.
“In general, the tools that require more user inputs provide more comprehensive retirement information and show how Social Security benefits are one part of the potential retirement income, along with savings, pension and housing assets,” the report concluded.
(Questions about new Social Security rules? Find the answers in my new ebook.)
Mary Beth Franklin is a contributing editor to InvestmentNews and a certified financial planner.