To nudge your clients into retirement planning, there’s no better place to start than their official Social Security Statement.

While it may be confusing at first glance, the statement is actually full of valuable information, and provides a reality check on the benefits clients anticipate receiving. Equally important, it gives you a launch pad for a broader discussion about retirement income planning.

Based on my experience with clients, here’s a guide for getting the most out of the statement.

TRACK IT DOWN
While the Social Security Administration updates statements annually, your clients have good reason to be confused about whether they have their statement or how to get it. That’s because the SSA has changed its distribution policies several times over the past few years.

The SSA, which since 1999 mailed annual statements to all future beneficiaries, suspended those mailings in 2011 because of budgetary pressure. In May 2012, Social Security restarted mailings, but only for people over 60. Later than year, it halted them again. Once again, the statements are now mailed out only to people 60 and older providing they have not yet filed for benefits and have not established an online account.

Social Security checks (Bloomberg News)

Clients who aren’t receiving paper statements, or have lost them, can access their latest one online via a brief registration process. Once they register with the SSA for online access, however, they will no longer receive any mailed copies.

GO TO THE BOTTOM LINE
Once a client has the statement in hand, the two of you can go over the information it contains about past work and future benefits.

Page 2 kicks things off with the absolute bottom line for clients: estimates of their actual future benefits at different ages. The first line, the full retirement age, is the linchpin number. This is the basic benefit, which kicked in at age 66 for the oldest baby boomers and is slated to rise to 67 for the youngest. The following two numbers (age 70 and age 62) are calculated relative to the FRA base number. If your client is already 62 or older the statement will list a ‘current age’ estimate in lieu of the age 62 estimate.

These values are only estimates, however. In order for clients to realistically anticipate their future benefits, it’s crucial they understand might affect these figures. Here are three important factors which can have an impact:

1. Earnings after age 62: These are NOT reflected in these estimates even though high earnings after that age could boost benefits. For example, if you have a 66 year-old client who is still working, her earnings after 62 are not included in these estimates. Although these extra years of work will have absolutely no effect on the estimates listed on the statement, they are not lost. When she finally does apply for benefits a re-calculation is made accounting for all years of work.

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Public sector workers could be in for a shock.

2. Cost-of-living adjustments: The statement estimates do not reflect future cost of living adjustments, which can significantly boost estimates. COLAs have averaged 1.7% over the last 10 years and 3.5% since 1975 (SSA.gov).

3. Public sector employment: Clients who have worked for federal, state or local governments could be in for a shock. Their benefits could be reduced by hundreds of dollars per month for any public sector earnings for which they did not pay Social Security payroll tax.

The bottom of page 2 outlines the two regulations which apply to these workers: The Windfall Elimination Provision and the Government Pension Offset. The WEP could reduce a monthly benefit by up to $443 depending on the number of years of public sector work. The GPO defines potential reductions to spousal benefits claimed by a public sector worker.

Image: Bloomberg
Image: Bloomberg

Importantly, these potential reductions are not included in the estimated benefits listed on page 2. The actual reductions are integrated into benefit calculations only at the time of filing for the actual benefit. Advisers can provide critical assistance to clients by helping them understand and prepare for the potential effects of these features. The SSA website provides convenient two-page slicks on both the WEP and GPO which clearly explains the details of these adjustments.

Estimates of potential disability benefits, child benefits and survivor benefits are also listed on page 2. The statement does not, however, provide any information about possible spousal benefits, survivor benefits, or divorced-spouse benefits. Estimates for these benefits are available only when one files for benefits and the Social Security Administration calculates the applicable amounts.

HISTORY IS CRITICAL
You can also help your client by taking a close look at two important inputs to those benefit estimates: total earnings and estimated future earnings.

The SSA calculates retirement benefits based upon the highest 35 years of earnings for which a worker paid Social Security payroll taxes. Page 3 contains the exact yearly earnings in the SSA records that will go into one’s estimated benefit. This list should include every working year in which your client paid payroll taxes.

If any of the yearly earnings are wrong, or if years are missing, benefits could be miscalculated. Your clients should take a walk down memory lane and review these annual figures to see if they appear correct. If clients have documentation of meaningful mistakes, they should immediately notify the SSA, following instructions on the bottom of page 3.

Page 2 also lists the estimated future yearly earnings that the SSA uses for their calculations. The more years that your client has before retirement, the greater impact this number will have in the estimates. Clients, especially those who are more than five years away from filing, should review this number. Significant discrepancies could throw off estimates. The lower half of page 2 provides more details on how benefits are calculated.

Finally, clients who grouse and complain that they’ll never get their money back will be interested in the estimate on page 3 of total taxes paid. This number shows how much money a worker actually put into the system. With some simple calculations, advisors should be able to demonstrate to most clients that lifetime benefit projections will handily exceed these contributions. That effort might ease their mind on this score.

The closer a client gets to filing for benefits, the more accurate the estimates become. Because of that, the statement is a great way to help clients annually course-correct their retirement income plan — with a clearer understanding of what those estimates really mean.