As clients approach the Full Retirement Age (FRA) of 65 to 67 years old, Social Security will become a cornerstone of their retirement plan. Some Americans are worried that Social Security won't be an option by the time they retire, while those already receiving Social Security say it's not enough. How are you addressing these concerns with your clients?
In addition to talking to your clients about their retirement funds and whether or not they plan to wait until they reach full retirement age to apply for Social Security, you can make sure you address some of the common myths around Social Security to ease their concerns.
Common myths about Social Security
Although the program has been around since 1935, Social Security can still be confusing and hard for the layperson to figure out. There's also a lot of misinformation that can find its way to people approaching retirement age. Here are some common myths that your clients might believe about Social Security, and the facts that you can provide to ease their retirement planning worries.
Myth #1: Social Security is running out.
This is not true; although the Social Security program has faced funding challenges, it will not “go broke." As long as your client and their employer(s) have paid federal payroll taxes, there will be available Social Security benefits to collect.
The Federal Insurance Contributions Act (FICA) and the Self-Employed Contributions Act (SECA) enable Social Security to collect revenue and pay out benefits. And although the federal government does occasionally borrow from Social Security reserves to pay for other government programs, it always makes full repayment to Social Security, plus interest, so there is money available for payments.
Myth #2: Social Security can replace your income.
It's important that clients understand that Social Security is not meant to replace their entire income upon retirement. Rather, their benefits will be based on how much money they earned over their lifetime.
Make sure clients understand how you can help them establish a retirement portfolio that will be supplemented by their Social Security payments.
Myth #3: Social Security payments are untaxed.
Depending on their income level and filing status, your clients are required to pay federal income tax on up to 85% of their payments. According to the Social Security Administration, payment is required for individual beneficiaries if their yearly income is over $25,000. For couples filing jointly, payment is required if their combined income is over $32,000.
Work with your clients to help them understand how much of their Social Security benefit will be taxed.
Myth #4: Cost of Living Adjustments increase year-over-year.
The Cost of Living Adjustment (COLA) is tied to a law that requires Social Security benefits to be adjusted depending on the rate of inflation. In years that inflation rises, Social Security benefits are adjusted to reflect the higher cost of goods and services. However, if there is no significant change in consumer costs, benefit payments will stay flat.
Myth #5: By continuing to work, your clients can lose benefits.
If your client is planning on working up until or past the NRA, they do not need to worry about a reduction in Social Security payments. However, for clients that choose to claim benefits before the age of retirement, Social Security will withhold a portion of their payment based on whether their earnings exceed a capped amount that changes each year.
Additional questions about Social Security clients may ask
In addition to dispelling these misconceptions about Social Security benefits, you may also be tasked with answering some common questions:
How much will my Social Security benefit be?
Explain to your client that this will depend on their lifetime earnings and the age at which they choose to begin receiving benefits. Make sure clients access their my Social Security account to determine how much they can expect to receive from Social Security.
Does being married affect my Social Security benefit?
Assure married clients that if both spouses have worked or are currently working, then both will collect separate Social Security benefits. However, if a client receives spousal benefits that exceed the amount of their own retirement benefits, Social Security will pay the larger of the two amounts.
Does receiving a pension disqualify me from receiving Social Security?
Help clients understand that in most cases, employers will have withheld Social Security tax from their paychecks, so their benefits will be paid in addition to their pension. However, if their employer did not withhold that tax, your client may be eligible for the Windfall Elimination Provision (WEP), which results in a lower Social Security payment than would normally be allotted in addition to their pension.
Retirement planning can be a worry-inducing prospect for clients, but they should be able to rely on their financial planners for help with Social Security benefits. Dispelling myths and being prepared with answers for common questions will help you and your clients be better prepared for the future.
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