Viability of the Old-age, Survivors and Disability Insurance (OASDI) program casually referred to as Social Security, has come under fire as of late. Cynics predict that the program will go broke by 2035, the year in which the youngest baby boomer will turn 70.
With 91 percent of retirees relying on Social Security benefits as a major or minor source of income, it’s easy to see why there is so much concern . A recent study by the Government Accountability Office projects the program will begin to run out of money starting in 2034 because of increased longevity and a decreased labor force.
It’s no surprise that “is Social Security running out?” tends to be a common client question. But before answering it’s important to understand a few things:
- Background about the program
- How we got to where we are today
- How the changes will likely affect all future financial planning advice that you give
Social Security: A Numbers Game
In 1945, just 10 years after the program’s inception, there was a 50-to-1 ratio of contributing workers to those receiving benefits. Today, there are more than 50 million people currently receiving benefits through payroll taxes that are paid by 150 million workers and employers, bringing the ratio to a mere 3-to-1. Experts project that by 2030 there will only be two workers contributing for every one person receiving benefits.
According to the 2016 Retirement Confidence Survey, primary reasons for this downward trend are attributed to:
- A large percentage of retirees leaving the workforce earlier than planned (46 percent)
- Downsizing or closures of the company (24 percent)
- Inability of workers to adapt to a job’s changing skill requirements (12 percent)
It’s easy to understand why both advisors and workers are concerned.
Financial Advisor Need-to-Knows
Now, more than ever it’s crucial to grow financial literacy and cultivate a deep understanding of Social Security rules and regulations, alternative investments and strategies, and new ways to increase one’s expertise.
Saving has long since been the main solution to financial planning for retirement, yet the simple truth of the matter is that not all workers are saving money for their retirement. The same Retirement Confidence survey reports 63 percent of workers are currently saving for retirement, however 66 percent of workers and 64 percent of retirees have under $50,000 saved for retirement — well below the recommended $400,000 nest egg.
Depending on whether or not your client is married, your recommendation for utilizing Social Security benefits for retirement income may change. Read this article on timing Social Security benefits for married couples to learn several strategies. Additionally, exploring new ways to diversify retirement income streams and bolstering professional expertise are the best ways to address your client’s concerns regarding Social Security benefits running out.
Risks to Address
Conscientious advisors should be aware of their clients’ risks and able to confidently guide them in making the best decision. Two risks worth focusing on when it comes to Social Security as retirement income are inflation and long-term care.
Longevity and Inflation
As stated earlier, clients are living longer and as buying power erodes over time, raising concerns. One built-in feature the Social Security program has to address this is its cost of living adjustment (COLA), which was 1.7 percent in 2015.
Many workers and retirees underestimate the average life expectancy, suggesting they may not realize how long their assets must last. No longer will single-product solutions and one-size-fits-all strategies work (if they ever did). Diligent advisors can mitigate risks associated with increasing longevity by suggesting investment strategies and products like variable annuities with a portion of the client’s portfolio.
Another major concern to address is that of long-term care. Seventy percent of the population in the United States is projected to require assistance completing daily activities at some point in their life, and family members are the ones who end up paying the majority of health and long-term care costs. It is essential to plan for these issues before retirement, yet only 35 percent of workers realize this (David A. Littell, JF, ChFC®, CFP®, “America Fails RICP® Retirement Literacy Quiz”, “The Wealth Channel Magazine”, Spring 2015).
Improved Financial Literacy for Retirement Planning
One of the most responsible, ethical and important steps for a financial advisor is taking proactive steps to improve their own expertise, confidence, and retirement planning literacy. Earning an advanced designation like the Retirement Income Certified Professional® (RICP®) enables advisors of all levels to develop comprehensive retirement income strategies designed for long-term success.
Courses in the RICP® curriculum offer in-depth lessons that cover the complete retirement planning process, from retirement income planning to leading-edge strategies focused on creating sustainable retirement income.
If you want to learn more about how the evolution of Social Security will affect your client’s financial future and how you can plan accordingly, download Social Security’s Role in the Advice You Provide now.
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