Social Security Claiming Is Advice Opportunity

Helping plan participants choose the right Social Security strategy can be a much-needed boon to retirement readiness.

When it comes to retirement income, says Tom McGirr, senior vice president of participant products and tax-exempt markets at Fidelity Investments, most people think of just one source: their 401(k) assets.

Most pre-retirees do not factor in Social Security and Medicare,” McGirr tells PLANADVISER, which can result in a seeming shortfall in retirement assets. To address this, Fidelity is dialing up the conversation on how best to maximize Social Security benefits, which he says both retirement plan sponsors and plan advisers need to know in order to inform participants.

“Most people don’t understand how the system works,” Jim Sampson, managing principal of Cornerstone Retirement Advisors, tells PLANADVISER. “They think that you turn 65, and a check starts showing up in the mail.” The high number of strategies around how and when to file, and the fact that you don’t get a do-over, make it critical for people to get the facts, he says.

“We’ve been hearing from our plan sponsors that they want to help ensure their employees are able to successfully transition to the next phase,” McGirr says. As well as personal savings, plan sponsors need to understand the importance of the totality of their participants’ assets. Beyond the 401(k), Social Security will play a substantial role in retirement income for many.

Three components—Social Security, Medicare and retirement income—are interconnected, and all play a part in a plan participant’s retirement readiness. Social Security has recently come in for increasing focus as a key building block, especially for low- and middle-income earners, because it plays such a critical part in helping these participants understand their income picture in retirement. “Social Security is going to provide a larger percentage of the income” for those at the lower spectrum of income, he observes.  

Next: The top mistake people make in claiming Social Security benefits.

Claiming too early is perhaps the No. 1 mistake people make, and it’s an irrevocable decision. Women can be especially vulnerable to this strategy. Specialized Social Security guidance can help participants understand the benefits of delaying. McGirr says that when people see the amounts they’d be able to claim at different ages—the difference between claiming at 62 or 65 or 70—they generally are very surprised.

“They understand the concept of delaying, but they don’t understand that it’s a significant difference,” he says, “upwards of 8% a year.” Over time, obviously, this can result in a substantial amount of money.

Guidance representatives work with Fidelity 401(k) participants or individual retirement account (IRA) holders in the firm’s retail channel to look at the individual’s complete situation. The goal is a comprehensive income plan that looks at a participant’s accumulated assets, and factors in information about the spouse, each person’s plans for retirement, how much income he or she is looking to replace, and what lifestyle is desired. “We work with them to identify sources of income in retirement,” McGirr says. “Some will come from accumulated assets and some from Social Security. There might be a pension from a previous job, or rental income. We bring that together and work with participants to do what-if scenarios.”

Cornerstone brought in a Social Security expert to do a group presentation to one of the firm’s larger clients. “It was a big hit,” Sampson says. “People walked away with a lot of info they didn’t have previously, and a great resource to get future questions answered.”

But one thing surprised Sampson: the audience. He figured it would be mostly older employees beginning to think seriously about how and when to claim, but there were many younger people in the room. “They were gathering information for their parents,” he says.