Everything You Need to Know about Social Security Planning

Randy Kitzmiller   |   April 2022   |   8-minute read
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Every financial advisor can offer the same essential solutions for clients or prospects. So, how do you differentiate yourself and add more value?

One answer comes through Social Security planning. It may surprise you since every advisor has access to the same information regarding Social Security. How can that be a differentiator? But the reason is simple — Social Security is one of the most important, yet most misunderstood tools in a retirement portfolio.

Social Security is misunderstood

Every year Nationwide does a consumer survey on people’s understanding of Social Security. The findings are quite profound, proving America is not very knowledgeable about the ins and outs of the program. Here are some of the examples we use to open the conversation.

Spousal Benefits

37% of the respondents did not realize that taking an early spousal benefit led to a lesser total spousal benefit. Typically, when a worker files for benefits, a spouse (age 62 or older) can receive benefits — as much as half of the primary insurance amount. While many think it’s time to start cashing in, a spouse will get more by deferring.


35% of respondents believe they need to file for their Social Security benefits before applying for Medicare. This simply isn’t true. The two programs are each available to help provide benefits in retirement, but they are independent of one another. Even if a client knows it makes financial sense to delay their benefit to maximize return, many end up filing unnecessarily early at the time they sign up for Medicare.

Maximizing Benefits

Here’s a big one. 54% of respondents believe that they know how to maximize their Social Security benefits. If that were true, we’d be in much better shape. Unfortunately, only 6% got the four pieces right for maximizing their Social Security benefits. That’s a startling discrepancy. Americans need your help.

Advisor Loyalty

This one may be the most important for you. 74% of respondents said they would leave their current financial advisor for better information on maximizing their Social Security benefits. Getting clients takes time. Don’t risk losing assets under management (AUM) because you assumed your clients understood their Social Security options.

Add this on to that same opportunity: 67% of respondents have not yet filed for their Social Security benefits. That means potentially two-thirds of clients are looking for some sort of Social Security advice from their financial advisor.

So, you have a majority of clients simultaneously looking for advice about Social Security planning AND willing to leave their current advisor to get it. Checkmate. That’s a blue ocean of opportunity.

Using Social Security statements

We could teach a whole seminar on using your client’s Social Security statements as a conversation tool. They typically don’t come in the mail anymore, but clients can look them up on socialsecurity.gov and they are fundamental to review.

Even more important is to have a discussion with your clients regarding a little section at the bottom of that statement that describes the Social Security shortfall. On the statement, it’s projected to pay about 78% of the benefits a few years down the road. Many clients haven’t looked at it in any level of detail.

However, many clients do have a misconception that Social Security won't be around at all in the future — and that's not the case. Social Security cannot go bankrupt because of how it’s funded. But a funding shortfall does mean that Social Security would go on at about 78% of its current benefits. That creates a need for planning on how to maximize the benefit. How can you make that income stream more efficient in your client’s overall retirement plan?

It's a great tool for opening a larger conversation about how your client will use their retirement income, and how to make sure that they can continue to live the lifestyle they have dreamed of.

Taxation of Social Security benefits

It’s a common question: “Do I pay taxes on Social Security distribution?”

45% of respondents believe that the distribution of Social Security is a fully tax-free benefit. For some, it is. For the majority, it is not.

Understanding a client’s Social Security tax rate starts by examining their modified adjusted gross incomes (MAGI). It’s a simple formula: take half of an individual’s Social Security benefits and add all other sources of income. That is going to include things like pension distributions, required minimum distributions (RMDs) from individual retirement accounts (IRAs), 1099 interest from nonqualified assets (whether a client is using them or not), dividends, capital gains, tax-exempt interest from municipal bonds … you name it.

Let’s look at a married couple, filing jointly for the purpose of this example. If their modified adjusted gross income is higher than $32,000, anywhere from 50% to 85% of that client’s Social Security benefit is taxable income. The 85% range is if you get above $44,000, which is beyond the scope of what we want to talk about here.

You probably won't be able to eliminate their tax on the Social Security benefits. But you can add value for your client by potentially reducing their tax exposure. And the only way to do that is to reduce their modified adjusted gross income.

One easy first step is to make sure your client is delaying their Social Security benefits. If they aren’t taking the benefit, it’s not going to produce taxable income. Delaying from 62 to 70 makes a big impact on total tax exposure.

Another step is to look for nonqualified assets that are kicking off 1099s or tax-exempt bond guilds. Try taking those from taxable to tax-deferred. Once you take it out of this equation it can have a significant impact on the taxation of their Social Security benefits.

In the end, Social Security maximization is important, but the taxation of the benefit in the distribution phase is paramount to increasing retirement success.

Benefits of Social Security COLAs

30% of the respondents to this specific survey did not know that Social Security has an inflation hedge and a built-in cost of living adjustment (COLA).

The cost-of-living adjustment will start compounding your client’s Social Security at age 62, whether you take a distribution or not. That provides you with an incredible tool to maximize Social Security retirement income.

Time to run through a scenario. Your client has a full retirement age benefit of $2,000 per month. Assuming a 3% cost-of-living adjustment and full retirement age of 66, let's do the math.

If the client decides to take the early Social Security benefit at age 62, it’s basically 75% of the total benefit. The distribution starts at $1,500 and we add COLAs all the way through at 3%. At age 66, the payment is up to $1,688. At age 70, the payments are $1,900. Not bad, right?

Now, here’s the beauty of delaying the benefit: The COLA starts at 62 years old, whether your client is taking a distribution or not. So, if the same client decides to wait for full retirement age, they get four years of the 3% adjustment, from age 62 to 66. Now, their full retirement age benefit is not $2,000 per month, it's $2,251. At age 70, the payment would be $2,533.

Take that same strategy, but delay distributions until age 70. By then your client has had eight years where the COLA was accruing, plus four years of the 8% bonus for deferring past full retirement age. Now you have a full retirement age benefit of $3,343 that will continue for the rest of your client’s life. Compared to the original scenario of $1,900 at age 70, you’ve created a 76% increase in Social Security income.

Time for your client to plan a vacation!

Even if you can only wait until full retirement age, you’ve gained a significant increase. If you can wait until age 70, you’ve really pulled the lever to maximize the full value of a client’s Social Security benefits.

Solving the Income Goal

Two couples. Same assets. Different outcomes. Let’s look at a situation where two couples start with equal assets, but one ends up with an estate value more than $600,000 greater than the other, based solely on pulling one Social Security distribution lever.

The background
  • Our couple is a 62-year-old male and 61-year-old female. Their assets include:
  • $996,000 in his 401(k)
  • $664,000 in her 401(k)
  • $450,000 in non-qualified assets

Their retirement income goal is $80,000 a year of after-tax income, increased at a 2% annual inflation.

With scenario A, at the time of the second death, there would be a projected estate value of $210,000. With scenario B, that same estate value is $865,000 estate.

Now, both scenarios achieved the $80,000 income goal based on 5,000 Monte Carlo simulations. But which advisor do you want to be? One that can meet your client’s expectations? Or one that can deliver 4x in value?

In this case, the additional value was created by maxing out Social Security distributions. Just one change impacted this client's estate by about $600,000. So, taking the time to fully understand how to optimize Social Security is important. Through math and science, we can illustrate exactly why it works — and how to apply it to your clients.

It’s your opportunity

From recruiting new clients to adding value for existing clients, Social Security planning is an important part of retirement income planning. Our team is available to host free, FINRA-approved educational client seminars on Social Security. We also have access to proprietary software that can quickly illustrate the effect of optimizing guaranteed retirement income streams through multiple approaches — including maximizing Social Security or adding an annuity. If you’d like to dig deeper into specific strategies for your clients, get in touch with one of our retirement income consultants, so we can help your clients and help your business grow.

About the Author

Randy Kitzmiller’s strength is his ability to simplify complex problems and solutions. With more than 25 years of experience, he works with advisors in Minnesota, Wisconsin and Iowa to help their clients find protection and security in their retirement planning.