A Social Security Reality Check
Clients’ SSA statements have invaluable information and are a great launch pad for discussing retirement planning.
Clients’ SSA statements have invaluable information.
TO NUDGE CLIENTS INTO RETIREMENT PLANNING, there’s no better place to start than their Social Security statements. While it may be confusing at first glance, a statement is full of valuable information and provides a reality check on the benefits that clients anticipate receiving. Equally important, it gives you a launch pad for a broader discussion of retirement income planning.
While the Social Security Administration updates statements annually, your clients have good reason to be confused about whether they have their statement or how to get it. That’s because the SSA has changed its distribution policies several times over the past few years.
The SSA started mailing annual statements to all future beneficiaries in 1999, but suspended those mailings in 2011 because of budgetary pressure. In May 2012, the mailings were restarted, but only for people over 60. Later than year, they were halted again.
Now, the statements are mailed out only to people 60 and older, provided they have not yet filed for benefits and have not established an online account.
Clients who aren’t receiving paper statements or have lost them can access their latest one online after a brief registration process. Once they register with the SSA for online access, however, they will no longer receive mailed copies.
GO TO THE BOTTOM LINE
Once a client has the statement, the two of you can go over the information it contains.
Page 2 offers the absolute bottom line for clients: estimates of their actual future benefits at different ages.
The first line, the full retirement age, is the linchpin number. This is the basic benefit, which kicks in at age 66 for the oldest baby boomers and will rise to 67 for the youngest. The next two numbers (age 70 and age 62) are calculated relative to the FRA base number. If your client is already 62 or older, the statement will list a “current age” estimate.
These values are only estimates, however. Here are three important factors that can also have an impact on the level of clients’ future benefits::
1. Earnings after age 62: If you have a 66-year-old client who is still working, her earnings after 62 are not included in these estimates. When she finally does apply for benefits, a recalculation is made accounting for all years of work.
2. Cost-of-living adjustments: The statement’s estimates do not reflect future cost of living adjustments, which can significantly raise estimates. COLAS have averaged 1.7% over the last 10 years and 3.5% since 1975.
3. Public-sector employment: Clients who have worked for federal, state or local governments could be in for a shock. Their benefits could be reduced by hundreds of dollars a month for any public sector earnings for which they did not pay Social Security payroll tax.
The bottom of Page 2 outlines two regulations that affect these workers: the Windfall Elimination Provision and the Government Pension Offset. The WEP could reduce a monthly benefit by up to $443. The GPO defines potential reductions to spousal benefits for a public sector worker.
Importantly, these potential reductions are not included
in the estimated benefits listed on Page 2. Advisers can provide critical assistance to clients by helping them understand and prepare for the potential effects of these features. .
Estimates of potential disability benefits, child benefits and survivor benefits are also listed on Page 2.
The statement does not, however, provide any information about possible spousal benefits, survivor benefits or divorced-spouse benefits. Estimates for these benefits are available only after an individual files for benefits and the SSA calculates the applicable amounts.
HISTORY IS CRITICAL
You can also provide assistance to your client by taking a close look at two important inputs to those benefit estimates: total earnings and estimated future earnings.
The SSA calculates retirement benefits based upon the highest 35 years of earnings for which a worker paid Social Security payroll taxes. Page 3 contains the exact yearly earnings in the SSA records that will go into one’s estimated benefit. This list should include every working year in which your client paid payroll taxes.
If any yearly earnings are wrong or if years are missing, benefits could be miscalculated. Your clients should review these annual figures to see if they appear correct. If clients have documentation of meaningful mistakes, they should immediately notify the SSA, using instructions on Page 3.
Page 2 also lists the estimated future yearly earnings that the SSA uses for its calculations. The more years that your client has before retirement, the greater impact this number will have in the estimates. Clients who are more than five years away from filing should review this number. Significant discrepancies could throw off estimates. The lower half of Page 2 provides more details on how benefits are calculated.
Finally, clients who grouse and complain that they’ll never get their money back will be interested in the estimate on Page 3 of total taxes paid. This number shows how much money a worker actually put into the system. With some simple calculations, advisors should be able to demonstrate to most clients that lifetime benefit projections will handily exceed these contributions. That effort might ease their mind on this score.
The closer a client gets to filing for benefits, the more accurate the estimates become. Because of that, the statement is a great way to help clients annually course-correct their retirement income plan — with a clearer understanding of what those estimates really mean.