Even for some of the wealthiest investors in the United States, Social Security is going to play a notable role in their lives post-retirement.
The federal program, which began in 1935 to ensure retired Americans would have income after their left the workforce, is considered one of the most treasured national financial programs. It takes money out of employment paychecks and returns it in monthly increments when the citizen is between the ages of 62-71, depending on when the citizen chooses to being taking benefits.
The longer the citizen waits to take the benefits, the more he or she gets every month. Citizens are recommended to take Social Security benefits after the age of 70, although they don’t have to.
For citizens born after 1960, the age to receive full Social Security benefits is 67. Taking benefits before one’s full retirement age will cause those benefits to be cut slightly for the remainder of the citizen’s life.
Advisors dealing with investors who are not yet retired or not receiving Social Security benefits needs to have the Social Security discussion with their clients. For those clients who use Social Security benefits as a major part of their monthly income in retirement, the decisions they make regarding when they begin taking benefits could be crucial.
Spectrem has conducted numerous studies related to Social Security. Its study Financial Wellness in Retirement not only provided quantitative research about the value of Social Security benefits it included interviews with retirees about how they depend on Social Security benefits. The whitepaper Social Security: When and Why details when investors take their Social Security benefits and why they did so when they did.
But Spectrem’s latest quarterly wealth segmentation series study – Financial Behaviors and the Investor’s Mindset - looks at Social Security from a different angle, asking investors whether they think the age for full Social Security benefits should be raised (which would save the program money) and just how far the age should be moved.
For instance, among Ultra High Net Worth investors with a net worth between $5 million and $25 million, 56 percent believe the age for receiving full Social Security benefits should be raised. Among those that feel that way, 39 percent believe it should be raised a year or two, to 68 or 69, and 47 percent think it should go up to 70 or 71. Another 14 percent of UHNW investors think it should go above the age when investors currently must start talking benefits.
This is really a political football to be handled by legislative bodies, and has no real effect on investor and their current Social Security picture. But advisors should educate and advise clients about when is the best time for them to take Social Security benefits to maximize the amount they get monthly. The wisdom of that move is determined by how long an investor lives, and that is impossible to calculate, but many investment decisions involve life expectancy and investors know their family’s history and their own health picture and adjust their plans accordingly.
There is some fear that, without significant changes, the Social Security system will run out of money sometime in the first half of the 21st century. One of the changes under consideration is not allowing citizens to receive benefits if they have an income in retirement that makes them less reliant on the benefits.
The Spectrem study asked the UHNW investors, those most likely to have a six-digit annual income in retirement, how they felt about the topic. One-third said they thought citizens with high incomes be ineligible to receive Social Security benefits, and of that one-third, 72 percent pegged the prohibitive level of income at $300,000 and above.
Top Takeaways for Advisors
Social Security is complicated and investors are likely to have difficulty understanding all the permutations. An advisor needs to sit down with investors who have not yet retired or started taking Social Security benefits and make sure they understand all the possibilities. Age and marital status play a big role in the wisdom of taking benefits at a certain time.
According to Spectrem’s Social Security whitepaper, only 31 percent of affluent investors have discussed their Social Security plans with their financial advisor. If investors do not wish to bring it up, advisors should do so.
Social Security is also a political football, and advisors would be wise to stay up-to-date on how it is being discussed in the federal government. Investors who plan to rely on Social Security for monthly income are going to be paying attention, and will want to discuss the issue with their financial advisor.
©2017 Spectrem Group