The Social Security Decision: 3 Questions to Consider

Courtesy of Sammons Institutional Group

Social Security plays a vital role for so many Americans in their retirement planning. Many clients will choose to take their Social Security benefit before they reach their full retirement age. As clients nearing retirement come into your office this year, having the Social Security conversation can help clients assess their overall retirement strategy and uncover new opportunities for generating assets.

Let’s face it, Social Security is an emotional decision. Individuals work for 40-plus years and pay into Social Security. By the time they retire, it could be one of the largest financial assets they have. It can be attractive for a retiree to start taking distributions as soon as they are eligible.

According to BankRate, 84.7% of Americans will take their Social Security before the age of 67. Typically, as a client is nearing retirement, they may ask you if they should take Social Security right away or wait. The answer is it depends on each individual’s personal financial circumstances.

Consider the following when talking with your client about their Social Security benefit:

1. Longevity
   First, ask what your client’s family history of longevity is. With concerns of running out of money in retirement, longevity is one of the biggest risks individuals face. Living well past 90 puts significant strain on a client’s financial resources. If your client has a family history of longevity, they may too.

• Health
  Second, ask your client how their health is. Despite a family history of longevity, if they face serious health issues, then it may be wise to access Social Security earlier.

• Financial Resources
  Last, ask your client if they feel they can afford to wait to take Social Security. Do they have other financial resources to replace their income if they decide to wait to take their benefits?
  
  If your client cannot afford to delay Social Security because they need the income right now, then the decision is easy: they take the distribution. However, if your client has the financial resources to delay taking Social Security then it creates some interesting financial planning opportunities to discuss.

Consider liability-driven investing

One example strategy some clients consider involves a form of liability-driven investing. The lower-earning spouse could take Social Security once they retire with the amount used for living expenses like gas, car payments, and food. The higher-earning spouse could delay taking their Social Security benefit until a later age.

This strategy allows the Social Security payment to grow larger, and the Social Security income is only 85% taxable, providing a tax-sensitive stream of income in the later years of retirement. In addition, if the higher-earning spouse passes away, their spouse will inherit this benefit amount. This protects the lower-earning spouse’s income in the event their spouse passes away. Since the higher-earning spouse is delaying taking Social Security, they may want to consider using a portion of their retirement assets to generate a consistent stream of income.

The value of guaranteed income

An annuity with a living benefit rider is an option for clients to turn on an income stream in retirement. Typically, this income can replace the Social Security income the higher-earning spouse would have received if they started taking their distribution at retirement or earlier. This income stream can be used to pay property taxes, utilities, cable, internet, or health care premiums. To be effective, this strategy assumes your clients have paid off their mortgage. This covers most of the basic expenses and the remainder of the assets can be used to pay for discretionary spending.

In-service withdrawals

Lastly, have a conversation with clients who are between the ages of 59 and 63 about possibly doing an in-service withdrawal from their 401(k) to offset the impact of higher interest rates. This may not be available for everyone, but if it is available for your clients, it can be a way to get the client into an annuity with a living benefit rider that can take advantage of the current interest rate environment and create an income stream in a few years, thereby allowing the couple to delay Social Security.

The Social Security decision can be an emotional topic, but it also provides an opportunity for financial professionals to bring options to their client’s Social Security decisions. This highlights the value that financial professionals can bring to their clients.

Tyler De Haan is director of advanced sales at Sammons Institutional Group.

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Sammons Institutional Group®, Inc. and Sammons Financial Network®, LLC., member FINRA, do not give tax, legal, or investment advice. Please consult with and rely on your own tax, legal, or investment professional(s). Taxes are payable upon withdrawal of funds, and a 10% IRS penalty may apply to withdrawals prior to age 59½.

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