The Biggest Mistake Advisors Make About Social Security

A general lack of Social Security expertise and comprehension among financial advisors has ultimately translated to an incomplete and flawed conversation about retirement income planning with clients. Avoiding, overlooking, or not initiating conversations about Social Security is one of the biggest mistakes made by financial advisors, and the implications can limit success potential and practice growth.

Because it’s such a widely used government program, advisors may have an unrealistic expectation about what or how much their clients know about Social Security. Identifying consumer misconceptions can help advisors pinpoint immediate areas in which their guidance can be profound or valuable. 

What Should Advisors Be Talking About with Clients?

In an interview with The American College of Financial Services, Mary Beth Franklin, contributing editor to InvestmentNews, explained that most consumers don’t know much, if anything, about Social Security, other than that they can eventually claim it. Piggybacking on this sentiment are findings from a survey of retirement-minded consumers and financial advisors conducted by the American Association of Retired Persons (AARP) which indicates only 9 percent of consumers believe they understand Social Security benefits. Advisors who proactively engage in Social Security conversations can differentiate themselves and be a valuable resource to people who need expert guidance. 

Glaring knowledge gaps about Social Security among consumers renders a massive opportunity for advisors who can fill them. Consumers lack critical information and education, and they expect their financial advisors to know the rules and details to help them get as much as possible from their Social Security benefits. If advisors want to successfully grow the arm of their practice that serves near-retirees or retired individuals, they need to thoroughly know the basic rules as well as the granular nuances about the program.

To best serve your clients, you should be prepared to discuss Social Security with them. Here are three prevalent misconceptions you can address to launch the conversation: 

1) Maximum payment amount — 88 percent of respondents knew delaying claiming past age 62 and until full retirement age of increases the monthly benefit, but only 5 percent knew by how much. Sixty-seven percent of respondents underestimated how much of an increase they’d receive. Delaying by just four or five years to full retirement age translates to a 25 to 30 percent increase, but without this education, many retirees forfeit these increases.

2) Age of payment maximization — 96 percent of consumers cite that maximizing their Social Security payments is a priority, but only 32 percent of respondents knew that claiming at age 70 results in the highest possible benefit. For many Americans, financial security during retirement and maximizing Social Security income are often directly correlated concepts, so this statistic is especially disturbing.

3) Spousal and divorced benefits — Only half of married (or formerly married) consumers know they’re eligible for spousal payments that can amount to 50 percent of the second spouse’s benefit. And even less, just 26 percent, of these married or formerly married survey respondents knew they were eligible for payments based on an ex’s work history provided the marriage had lasted at least 10 years.

How Can Advisors Prevent a Client Exodus?

Financial planners must acknowledge that clients expect guidance, and if they don’t get it, it’s not uncommon for them to change advisors. A 2016 survey by Nationwide Retirement Institute of Americans age 50 and older found that 76 percent of future retirees who currently work with an advisor, or have plans to hire one, will switch to one who can help them maximize Social Security. Fifty-nine percent of respondents who work with a financial advisor reported that their advisor had never provided advice about Social Security. More than half of those who had received advice reported having to initiate the conversation themselves. This backward dynamic could be the result of advisors lacking overall confidence about Social Security or an unrealistic perception about what their clients do or don’t already know.  

How Should Advisors Approach Social Security Conversations With Clients?

First and foremost, advisors should proactively initiate discussions about Social Security and never avoid them because they lack confidence or expertise. Though it may be uncomfortable to do so, it’s likely in a client’s best interest to address the topic and therefore connect them with a trusted professional who can help them is an exercise of sound fiduciary responsibility.

Advisors who are confident about discussing Social Security can start meaningful conversations from a perspective of education. Help clients understand how Social Security operates now versus in the past so they can overcome misconceptions or false expectations. Show them that in the past, retirement security was like a three-legged stool made up of a pension, personal savings and Social Security. Now, pensions are all but extinct for most workers. Personal savings have grown increasingly inadequate and Social Security, while still a fairly dependable source of income, has its own inherent flaws. The stool now operates as more of a pogo-stick, and even though almost six out of 10 Americans depend on Social Security as an important piece of their retirement income, it’s not an ideal stand-alone solution. As Franklin suggested in her interview, think about retirement income as a pyramid versus a stool concept.

For many modern retirees, the ideal retirement income plan is structured like a pyramid with Social Security as a broad base foundation. Stacked on top is income from retirement plans like 401(k)s, 403(b)s or IRAs. Layered on top of those is income earned by older workers continuing employment or re-entering the workforce. Next comes income opportunities associated with home equity, such as a home equity line of credit (HELOC) or paying off a home. Finally at the very tip of the pyramid is a much smaller percentage of older workers who have investable assets outside of these more common income components.

However you choose to educate clients, firmly understanding and confidently advising about comprehensive retirement income solutions will better position you as an expert they can trust through their “golden” years. Avoid the mistake of not talking to clients about Social Security because data proves they crave and need your help. The Retirement Income Certified Professional® (RICP®) designation has helped thousands of advisors develop expertise that enables them to better serve their retired clients. Read The Guide to Being a Successful Retirement Income Planner to learn how you can grow your practice with advanced education.