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Clients worry about future Social Security cuts

Advisers need to monitor the political landscape and develop backup plans

Aug 12, 2019 @ 2:43 pm

By Mary Beth Franklin

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.

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