Planning Matters (June 2017) – Social Security and the Foundations of Retirement Planning

by David Cechanowicz, JD, MSFS, AIF®, Senior Financial Planner
REDW Stanley Financial Advisors, LLC

Recently, I read an article on retirement income planning that focused on the “best” combination of investments for a couple approaching retirement. The authors proposed that three hypothetical investors set out on their retirement journey with a healthy pot of money in the cookie jar and $24,000 of annual Social Security benefits as foundational income. The analysis then proceeded to look at three different ways to invest the nest egg to allow for the most flexibility in retirement.

I am quite sure that some investors are drawn to the mechanics of portfolio management and asset allocation while others are quite content to hire professionals to manage their accounts. But let’s compare this approach to retirement income planning with three different families that are about to go on an extended vacation, car and trailer included. They have all been assigned the same vehicle and the investment puzzle is focused on how to pack the trailer. I suppose the theory of this exercise is to see which couple will have the best trip, all other things being equal.

But in planning, as in life, all things are not equal. Assuming the same starting point for the foundation  of the retirement income plan is all wrong. We know that for each year a Social Security recipient delays claiming after age 62, he or she will get an increase in benefits.

Assigning everyone the same vehicle make and model ignores the fact that you may have the ability or desire to pick a four, six, or eight cylinder engine, with each upgrade making a world of difference on a long-haul trip.

Might it be possible that our travelers will be better off selling some of the contents of the trailer to purchase a larger engine for the car? Consider the current economic realities of safe and stable investments and their low rates of return.

Delaying the claim for retirement benefits past full retirement age allows the benefit to increase by 8% for each year of delay. Social Security can be best compared to the income from a safe, stable investment that has the added protection of cost of living increases. Shouldn’t the guaranteed 32% increase in full retirement age benefits be worth a serious look?

Let’s say you are a dual income baby boomer couple. Each of you has a primary insurance amount (PIA) of $1,800 at your full retirement age and you are both the same age. If both of you were to delay to age 70 to collect your retirement benefits (not counting the cash flow that might be available for a claim of restricted benefits), each of you will have a monthly guaranteed increase in retirement income of $576. Total household income at age 70 will increase by $13,824 assuming there are no additional cost of living adjustments.

Compare that income increase with the amount of retirement plan assets needed to produce $13,824 per year using a 4% portfolio drawdown rate. As a couple you would have to accumulate an additional $346,000 in assets to produce an equivalent income stream. That is the effect of partially delaying Social Security retirement benefits for just four years.

I know some investors might say, “Hey wait a minute, it’s not really that much money because there’s no Social Security benefit left over when the vacation is done.” My response is, yes, but we are talking about a leased car anyway, and we were always driving a leased car. It’s the foundation of this trip that’s being examined. The journey could be a whole lot different with the bigger engine, don’t you think?

The moral of the story is that planning that focuses primarily on how the trailer is packed while ignoring the foundations of Social Security totally misses the boat. We understand that in the current marketplace of extremely low safe interest rates, investors are well-served by considering all the options that make up the retirement income plan. There is no one shiny investment that can go into the trailer that is going to make life all good on the journey. It is also unwise to make an assumption that everyone starts with the same basic vehicle on this retirement road trip.

Consider the following chart, showing when people claim their Social Security benefits. It illustrates how well consumers have gotten the message that the trailer is more important than the car.

* Source: Annual Statistical Supplement, 2016, released May 2017, Social Security Administration, Table 6.B5. Numbers adjusted to reflect only individuals who had the ability to pick the start of their retirement benefits. No conversions from disability claims to retirement are included.

Almost half of the claimants chose between four and six cylinder retirement engines with less than 4% of the total, taking advantage of the built-in deferred retirement credits that are available for those who wait past their full retirement age.

Living on the edge of the Rockies, I can tell you that an underpowered vehicle does not make it through the mountains easily. An underpowered vehicle may be okay on the flatland. Quite frankly, I prefer the drama and majesty of the ride to the mountains to miles and miles of endless plains.

Of concern to us at REDW Stanley Financial Advisors is the fact that a recent study conducted by Nationwide Insurance pointed out serious deficiencies made by retirees or potential retirees concerning their Social Security retirement benefits. The study found that more than 86% of future retirees could not correctly identify the factors that determine their Social Security benefit amount. Of even greater concern is the fact that only 11% of claimants indicated that they used the help of a financial advisor in making their claiming decision. That’s a significant drop from the previous study that indicated that 17% of claimants sought the help of a professional advisor.

The core reality of these numbers means that almost 90% of retiree claimants are making one of the most important financial decisions of their lives without professional assistance. We want you to know that while we have the staff to design and implement investment portfolios to meet your retirement income needs, we also are fully staffed to look at all aspects of planning for retirement, especially those that establish the foundation of your retirement income planning.

Quotes and Smiles

Life is short, and we do not have much time to gladden the hearts of those who travel with us, so be quick to love and make haste to be kind. —Henri-Frédéric Amiel (1821-1881)

People travel to wonder at the height of mountains, at the huge waves of the sea, at the long courses of rivers, at the vast compass of the ocean, at the circular motion of the stars; and they pass by themselves without wondering. —St. Augustine (354-430) (Augustine of Hippo) – Confessions X (c 397)

© Barbara Smaller / cartoonbank


Copyright 2017 REDW Stanley Financial Advisors, LLC. All Rights Reserved. This publication is intended for general informational purposes only and should not be construed as investment, financial, tax, or legal advice.