For wealthy clients, Social Security isn’t likely a necessary part of their retirement income. But they didn’t get where they are by leaving money on the table, and advisors may need to change strategies to help them get the most out of the embattled government program.
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With Social Security’s main retirement trust fund projected to run short in 2032, when it would only cover 78% of retirees’ scheduled benefits, clients may be wondering whether they should claim at 62, save more on their own, adjust portfolios or just prepare for massive distribution cuts.
“I wouldn’t be racing due to Social Security to take the money early if it’s because you’re concerned they’re going to run out of money,” Ash Ahluwalia, managing director and head of Social Security planning at OneTeam Financial, a Prosperity Capital Advisors company that offers retirement planning and wealth management services, said in an interview. “I think there are so many levers they can pull to fix the problem.”
Still, insolvency isn’t an impossibility, and any solution could change the age at which retirees can claim full benefits or reduce payouts. Advisors then should be planning for potential loss of income even for wealthy clients.
Alternate sources of income
Financial planners might want to start discussing with clients plans for a possible 20% benefit cut or temporary lapse in full benefits, said Jason J. Fichtner, executive director of the LIMRA Retirement Income Institute.
“My advice has always been that you hope for the best, but you plan for the worst, meaning you hope that a future Congress and president will come together before trust fund depletion in 2032 and make Social Security solvent, so that 50-plus million Americans aren’t facing a 20-plus percent across-the-board haircut in their benefits overnight,” Fichtner said in an interview. “But you plan for the worst by thinking: OK, we have not seen Congress really able to take on bipartisan, tough challenges lately.”
Clients can start making additional catch-up contributions at age 50. Older clients don’t have much time for adjusting their plans, “but they might need to start thinking about how they reallocate their portfolio,” Fichtner added.
“Maybe taking some time to save more now, if you’re able to save more,” Fichtner suggested. “Times are tough. Inflation’s there. … It’s not like pushing an ‘easy’ button, and I realize that. But these are the hard conversations that have to happen.”
Jay Pelham’s practice, Kaufman Rossin Wealth, a Miami-based registered investment advisor, tests clients’ reliance on Social Security and other retirement income and looks at asset allocation, asset location, tax efficiency and protecting plans from long-term care events, he said.
“We’ve chosen to work with them to ensure they are not as reliant on that as their source of retirement income, and we built in place other sources,” said Pelham, who is president of the practice. “We run sensitivity analysis where we say, ‘OK, let’s assume you only get half your Social Security benefit. How did your plan still come out?'”
READ MORE: How advisors can add value as Social Security, Medicare uncertainty grows
Feelings about Social Security vary with age
Clients are often career-focused and aren’t worrying about Social Security, in Robert Conzo’s experience. Older clients mostly talk about when to take Social Security, not whether the program will exist, while younger people just assume benefits won’t be available when they retire.
“It’s a little bit of ‘head in the sand’ for older people, and a little bit of ‘it’s not going to be there’ for younger people,” Conzo, CEO and co-founder of The Wealth Alliance, a registered investment advisory firm, said in an interview. “It’s kind of a very extreme left or right response, I find.”
Typically, the younger people Conzo is speaking with about Social Security are clients’ children, whom he encourages to come in so he can educate them.
For younger clients, planners tend to consider benefits will be one-third or half as much or take the ‘pretty drastic’ approach of not taking Social Security into account, he added. Planners also model 401(k)s, IRAs and other accounts to how much clients will need to save, increase the equity allocation in their portfolios, work longer or work part time during retirement.
Another approach is saving more for retirement by saving less for children’s college costs, leaving more of the education costs to the child.
“They’re starting to say, you know: ‘Maybe I should fund that a little less,” Conzo said. “Maybe have the child have a little bit more skin in the game and me put a little bit more money towards my retirement to combat the Social Security potential downfall.'”
Advisors can help clients adjust their retirement income strategies, such as if clients want to be less dependent on Social Security checks.
“If you’re really concerned about it: Fine, let’s model in a 20% reduction,” Ahluwalia said. However, for most clients, “I just don’t feel like I’m quite there yet, that I’m going to hit the panic button and tell my clients everybody should take it as soon as possible because you’re going to get a big reduction.”
Instead, he would rather clients delay claiming benefits for one or two years, and the larger checks would offset a significant part of the potential benefit reduction.
READ MORE: Anxiety drives Americans to claim Social Security early
Advisors have noticed that having ample savings doesn’t mean clients won’t get nervous.
“Surprisingly, some people that have plenty of cushion and plenty of money in their plan, they still get anxious about stuff like this,” Pelham said.
However, less wealthy clients might be even more concerned, especially depending on their exact situations.
“If someone hasn’t saved as much, they don’t have family that is part of their picture, they don’t have any pensions or other incomes, and they’re relying on that Social Security for a meaningful portion, then those are the people that that get concerned and have a legitimate reason to get concerned,” Pelham said.
Similar to diversifying investments, he urged diversifying income sources between Social Security and, for example, a 401(k). If a client downsizes residences, that can also help.
“If you’re working with more affluent clients,” Pelham said their attitude is, “‘I’d like to get this. That would be great to have that money in retirement, but I’m not counting on it,’ and so it really hasn’t been a big topic of discussion with our clients.”
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