Less than one-third of clients know how much they will need to save to supplement social security benefits during retirement. Even fewer clients know what their spouse's Social Security benefits will be.

These astonishing facts are according to the nation's leading branch managers. As part of On Wall Street's Third Annual Branch Manager Awards, sponsored by MainStay Investments, we asked top branch managers their thoughts regarding their advisors' clients understanding of the new state of Social Security, and what they are doing to help provide education about this topic.

The Changing Role of Social Security

Social Security was introduced in the 1930s as a result of The Great Depression, and was essentially designed to help provide financial assistance to retirees during one of the most difficult economic times in our nation's history. Over the years, Social Security has evolved, and up until recently it was considered a primary source of retirement income for many individuals.

As we exit "The Great Recession," numerous similarities exist between The Great Depression and the economic circumstances retirees find themselves in today-primarily the fact that Americans face great uncertainty surrounding taxes, health care, and financial security. However, there is one main distinction between the two eras: Today, Washington is less willing to intervene to help bolster financial security for retirees. Some in Washington continue to reinforce the concept that individuals are responsible for-and should take a more active role in-their financial future. This may not be an issue for younger investors, who contend that Social Security will not play a critical role in their retirement. However, many boomers still believe that Social Security is something they can count on.

While the branch managers we interviewed believe that there is still a strong need for education on the topic of Social Security, many noted that today's message is different. Top branch managers indicated that their financial advisors are significantly downplaying the role of Social Security in an effort to manage their clients' expectations and present alternative income solutions.

"In our retirement planning analysis, we run projected cash flows and income needs with and without Social Security, due to the uncertainty of exactly how it's going to get paid, when it's going to get paid, or if it's going to get paid at all," one branch manager says. Another branch manager concurred, stating: "In all of our retirement projections, we discount the value of the client's projected social security income and encourage clients to assume that Social Security will not provide much, if any, income throughout their lifetime."

Navigating the Pitfalls

While the possible decline in Social Security benefits represents a real challenge to individuals, there's actually an opportunity for financial advisors to educate clients and determine retirement income strategies to meet their needs and bridge the income gap. Unlike other decisions clients may make throughout their lifetime, some of the decisions they will be forced to make now will be irreversible. Knowing a client's options, and ensuring they are maximizing their benefits, can be a key differentiator for financial advisors in helping to build strong client loyalty.

Some of the most common mistakes that can dramatically affect the amount benefits an individual will receive are:

  • Taking Social Security Benefits Too Soon: According to the Social Security Administration, 72% of current recipients receive reduced benefits because they started taking benefits prior to their full retirement age. This can mean the difference between receiving reduced benefits of $1,430 per month at age 62, or full benefits of $1,971 per month at age 66.4, which can severely impact your clients' ability to meet their income needs, especially if they live well into their 90s.
  • Lack of Knowledge Regarding Spousal Benefits: Branch managers indicated that approximately three-quarters of clients did not know their spouses' benefits. Since a spouse is eligible to receive either their own Social Security benefit or one-half of their spouse's benefit (whichever is higher), if one spouse decides to take benefits early, it will have a direct adverse impact on the amount the other spouse may be entitled to in the event of their death.
  • Working in Retirement: Working during retirement can also reduce your clients' benefits, especially if they begin collecting Social Security before they reach their full retirement age. In 2010, the annual earnings limit was $14,160. That means if you client earns more than $14,160 annually, your benefits will be reduced by $1 for every $2 over the limit. Once you reach full retirement age, you are no longer subject to the annual earnings limit; you can earn as much as you like without incurring a reduction in your social security benefits.
  • Impact of Taxes: If individuals have sources of income in addition to Social Security, they may have to pay taxes on their social security benefits. Those additional sources of income would include items such as wages, self-employment income, interest and dividends, or pension income. If an individual is married and the combined family income exceeds $44,000 ($34,000 for individual filers), then 85% of social security benefits will be taxable.

These are just a few points to consider. There are literally millions of permutations. For every rule of thumb, there are dozens of exceptions.
Social Security Best Practices

With thousands of baby boomers applying for Social Security benefits every year, the Social Security Administration is not able to provide support and guidance to individuals applying for benefits. Sitting down with clients and actually helping them apply for benefits, explaining available options, and alerting them to issues that can arise, makes financial advisors a huge resource for their clients.

A holistic approach to retirement planning means fact finding and education on any and all possible sources of income. If you're not taking such an approach to educating your clients on the role Social Security will play, you may be leaving them in the dark or unprepared. Here are some tips from top branch managers on how to educate clients about Social Security.

  • Open a Dialogue ASAP: Some branch managers say financial advisors can even use social security benefits as a reason to initiate client contact. According to one branch manager, it's a conversation starter and an excuse to set up a meeting. "Since two months before a client's birthday he receives a social security statement, we call him and ask him to come in for an annual review and to bring the statement with him. That's working pretty well."
  • Work with Experts: Branch managers acknowledge that there are many nuances when it comes to collecting Social Security benefits. To keep advisors up to snuff, many branch managers said that they bring in experts from the Social Security Administration and/or they partner with universities to provide advisors education. When it comes to passing along that information to clients, 77% of branch managers said that rigorous financial planning is the best ways to educate clients on the role Social Security will play in their retirement, followed by seminars with these types of external experts.
  • Provide Alternative Income Solutions: With Social Security comprising a smaller component of retirees' income, part of client education is being knowledgeable about supplementary sources of income, such as dividend-paying stocks, fixed income and municipal bond funds, as well as guaranteed lifetime annuities. Helping clients feel confident that there are alternatives to cover the income gap is essential to gaining their trust and helping them reach their retirement goals.

Matthew Leung is a director and head of practice management
programs at MainStay Investments, which sponsors
On Wall Street's annual Branch Manager Awards.

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