One of the most important ways advisors can assist their clients in preparing for retirement is by helping them change their mind-set about Social Security. Most people think of Social Security as an IOU, that is, something the government owes them. Upon turning 62, it can be tempting to say, "I want what I've got coming."

Instead, individuals should think of their Social Security benefit as an asset because that's what it is. It is a unique and valuable resource. What investment vehicle could you use today that would offer you what Social Security provides—a federal government-backed, annual inflation-adjusted stream of income that lasts as long as you live? There is simply no product we can offer our clients that duplicates these features.

A UNIQUE BENEFIT

Consider Mary, who was born in 1950 and begins receiving Social Security at her full retirement age of 66, when her monthly check amounts to $2,521. Assume Mary collects benefits until age 90, and that her annual cost of living adjustments are 2.8% per year. The present value of Mary's Social Security benefit is $412,896.

Mary would be stunned to learn that she would need more than $400,000 to purchase an annuity that could replace the income Social Security promises to pay her—if one exists. Yet most advisors leave Social Security decisions up to their clients and simply plug the annual benefit into their retirement income projections. If a client told you she had $400,000 in a savings account, you surely would not tell her, "Oh, just do anything you want with it!" Social Security deserves the same careful consideration.

If you don't discuss Social Security with your pre-retiree clients, you're doing them a disservice. Raising this issue offers the ideal chance to demonstrate how you add value as an advisor. In addition, it opens the door to a wide range of related topics such as the pros and cons of part-time work, long-term- care insurance and how the date that your clients start receiving Social Security affects the size of their monthly checks.

TIMING IS EVERYTHING

As you know, baby boomers—born from 1946 through 1964—who start Social Security at age 62 will see their full benefit permanently reduced by 25% or more. Clients don't understand that this gap compounds, getting wider over time. That's because the annual cost-of-living increases that Social Security provides are based on the dollar amount of the benefit; the same percentage increase applied to a smaller dollar amount translates into fewer dollars. As a result, the person who takes early benefits is always losing ground on an absolute basis. Early benefits also reduce a spouse's survivor benefit.

Postponing the start of Social Security beyond full retirement age increases the benefit by up to 8% per year, plus the annual cost-of-living increase. Thus, if a client's full retirement age is 66 and inflation runs 2.8% annually, for each year he or she delays the onset of Social Security, the benefit goes up by almost 11%. In this case, if the client's full retirement benefit was $2,521 per month, waiting four years to collect means that the check would be $3,822-about 50% higher.

I'm not suggesting that everyone postpone Social Security until age 70. If your clients need income or have a medical condition that will shorten life expectancy, they should probably consider starting Social Security as soon as possible. But if your clients' portfolios generate sufficient cash flow, why not postpone, and benefit from a higher payout?

On the other hand, if your clients are taking withdrawals from their portfolios and the markets go into a prolonged decline, it might be advisable for them to start Social Security benefits sooner rather than later. That would reduce withdrawals and give their investments more time to recover.

The point is, you owe it to your clients to educate them, so that, with you, they can make an informed decision about when to sign up for Social Security. This can reframe the entire retirement income discussion.

Gail Buckner, CFP, AIF, is a retirement and financial planning specialist with Franklin Templeton Investments.