Social Security is set to run out in about eight years, according to the program’s trustees. That means advisors will have to reevaluate how they make retirement plans for their clients as the time frame gets shorter.
It also means they better be ready to answer questions from concerned clients - if they haven’t been hearing them already.
The Social Security fund will run dry in 2033, unless Congress combines the program's old-age and disability funds, in which case insolvency would arrive in 2034, a government report found this summer. If Congress fails to address the projected budget shortfalls, automatic cuts will roll back benefits by 23% in 2033.
Roughly 70 million people are set to receive Social Security benefits this year. The average Social Security retirement benefit for a retired worker is approximately $2,000 per month, according to the Social Security Administration. One can start receiving reduced benefits as early as age 62, but claiming later, up to age 70, can increase one’s monthly payment.
For clients nearing or already in retirement, Alana Macy, financial planner at Bloom Wealth Advisors, continues to include Social Security in her projections. However, for her wealth accumulator clients, especially those in their 30s and 40s, she takes a more conservative approach.
“Given the uncertainty of Social Security’s future, I focus less on it and more on their savings rate, long-term investment strategies, and retirement tax strategies," Macy said.
When advising clients about retirement, Macy said she emphasizes the importance of focusing on what they can control, especially in uncertain times.
“While the future of Social Security remains uncertain, we have the ability to control key factors in our financial lives, like how much we save, how much we invest, and how we manage our spending. By maintaining control over these areas, we can better position ourselves for a secure future, regardless of what happens with Social Security," Macy said.
Meanwhile, John McGowan, financial advisor at Carson Wealth, said he is already fielding many questions from clients and prospects around the longevity of Social Security. His reply to clients is that he does believe that the government will take action that will ensure that Social Security benefits will not be affected. From a planning perspective, he is assuming that no action will be taken and benefits will be reduced for those over 50 by 15% to 20%, and those under 50 will not receive any benefits in the future.
“We preface that while these are not our views, we want to ensure that we are planning for every scenario, whether positive or negative. This helps our clients know that they will be okay whether they receive social security or not,” McGowan said.
Finally, Nicholas Gertsema, certified financial planner at Gertsema Wealth Advisors, believes the common misconception is that running out of money in the trust fund would mean that Social Security would not be able to pay any benefits. In reality, he points out that they would still be able to pay about 75% of benefits.
"We have always assumed that Social Security benefits would go up by 60% of inflation when we create plans, just to make sure we have a safety net built in. When creating a retirement plan, we try to plan for 3 scenarios: best case, worst case, and most likely,” Gertsema said.
Added Gertsema: “We do discuss the possibility of a 25% cut to Social Security benefits and model what it would look like for those concerned, but it usually doesn’t wind up being as catastrophic as they fear."
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