When it comes to Social Security, age 67 is considered full retirement age. But it hasn’t always been that way. Originally, the Social Security Act of 1935 set the retirement age at 65 years old. The age increased to 67 in the 1980s. Today, a bipartisan group of politicians on Capital Hill is seeking to increase the retirement age to 70, while Republican presidential nominee and former South Carolina Gov. Nikki Haley also supports raising the retirement age.
For advisors and clients, this creates a challenge. How do you plan for clients’ golden years and run financial projections when their retirement age is uncertain?
Read on to understand how advisors run retirement simulations for their clients in an always-changing retirement landscape.
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Factoring in Retirement Headwinds
Advisors often run simulations for clients to get a better understanding of what retirement may look like given a range of economic and fiscal factors, including those impacting Social Security.
“Regarding simulations, we test poor market environments, living longer, a long-term care event, inflation staying high and taxes going higher, to name a few,” says Ryan Salah, who is a certified financial planner (CFP) with Capital Financial Partners. “These simulations change based on the client’s goals and objectives but also depending on the client’s age.”
Some advisors also run projections without Social Security. “I like to run all of my retirement projections without Social Security as a worst-case scenario and then plan accordingly as Social Security has never been updated since its inception to account for the increasing life expectancy that Americans have enjoyed for the past few decades,” says Dana Menard, founder and lead financial planner for Twin Cities Wealth Strategies.
Menard also crunches the numbers using the current Social Security rules to make sure he has the best-case and worst-case scenarios tallied. “So I run (Social Security) projections as if they were to take it earliest at age 62 or wait until age 70 to max it out, accounting for all contingencies,” Menard says.
For Younger Clients, Adjustable Savings Strategies Are Key
Finding the right retirement age has been a debate among Menard’s younger clients because many wonder if Social Security will exist by the time they retire in the next 20 to 30 years.
The Social Security Old-Age and Survivors Insurance Trust Fund is now on pace to run out of money by 2033, one year earlier than previous projections indicated. If the trust fund runs dry, Social Security benefits would be cut by 20%.
“This has been a point of contention for most of my clients as they are Gen X and Gen Y business owners and still have over a decade before they are even thinking about retirement,” Menard says.
For clients who are just beginning their journeys, Salah works to create savings strategies that help them adjust as the years go on, which is a different strategy than what Salah uses for clients closing in on retirement.
“For younger clients, the focus is more so on building a nice foundation and establishing good savings (and) spending habits,” Salah says. “We also would focus much more on risk management compared to clients approaching retirement (though the emphasis for those older clients is more on long-term care).”
Retirement ages are ever-changing and will likely continue to adjust in the coming years. As clients wonder about the existence of Social Security in the coming decades, advisors will have to navigate calculations and simulations that project what their client’s life will look like without Social Security.
Tips for Growing Your Financial Advisory Business
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Expand your radius. SmartAsset’s recent survey shows that many advisors expect to continue meeting with clients remotely following COVID-19. Consider broadening your search. And work with investors who are more comfortable with holding virtual meetings or spacing out in-person meetings.
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