Data & Research March 1, 2016

Timing Is Key When it Comes to Social Security

Northwestern Mutual has issued a report to help people develop a strategy.
Reported by

The uptick in longevity and the resulting possibility of a longer retirement will create added financial pressures for many workers, according to Northwestern Mutual. 

For many Americans, Social Security is a key component of retirement funding. Knowing how to navigate its intricacies, especially changes under the Bipartisan Budget Act of 2015 taking effect on May 1, 2016, is essential to maximizing the benefit and building a sound financial strategy for retirement.

For more stories like this, sign up for the PLANADVISERdash daily newsletter.

This is why Northwestern Mutual has issued a white paper, “Social Security Simplified: Select the right options to help maximize your income.” The points it lays out can be helpful for advisers who wish to work with investors on Social Security strategies.

In its 2015 Planning and Progress Study, Northwestern Mutual learned that the majority of Americans plan to begin taking Social Security between the ages of 65 and 67, “but that may not necessarily be the best path depending on other financial and life circumstances,” says Rebekah Barsch, vice president of planning at Northwestern Mutual. “It should be a priority to ensure that your retirement plan provides sufficient income for as long as necessary, particularly considering rising costs and ongoing economic uncertainty.”

As a first step, Barsch recommends that people become familiar with various Social Security benefits types, distribution schedules and benefit calculators. One example is determining one’s cross-over age—the age at which the total amount of benefits a worker would receive having started distributions after full retirement age (FRA) exceeds the total benefits he or she would receive if they started taking benefits before FRA.

NEXT: Five key factors

According to Barsch, there are five key factors that an individual should consider with regards to when to start taking Social Security.

Savings and investments—If you have enough money saved, it may make sense to use those savings before collecting Social Security at or after FRA. Conversely, if an individual has meager savings, taking Social Security early in order not to incur debt may be a better path.

Health and longevity—For those in good health, it may make sense to continue working and delay taking Social Security to maximize the benefits later. However, if you’re in poor health or think you’ll have a shorter life expectancy, delaying benefits may not make sense.

Taxable income—Social Security benefits are taxed in accordance with a couple’s combined income. However, even at the highest taxable percentage, they compare favorably with distributions from individual retirement accounts (IRAs), 401(k)s or other retirement sources. By delaying receipt of Social Security benefits to FRA or even age 70, one may get a higher level of benefits.

Current and future earnings—The earnings rule sets guidelines around how much income you can earn before your FRA without risking a benefits reduction.

Family status—Social Security has a number of specific rules that apply to current, surviving and divorced spouses. A knowledgeable adviser can guide you on this.

As Northwestern Mutual says in its white paper, “Timing your Social Security benefits may be the most important retirement decision you can make.”

The report notes that individuals who begin taking benefits at FRA receive 100% of their Social Security benefits. Those who delay until after FRA earn 8% in delayed retirement credits for each year they choose to delay, up until age 70. Thus, some retirees can increase their benefits by as much as 32%. Conversely, if an individual retires at age 62, the earliest possible year, their benefits are reduced by 25%.

The “Social Security Simplified” report can be downloaded here.

In Practice March 1, 2016

Institutional Clients Don’t Always Speak Your Sales Language

A new report from Market Strategies International finds asset managers and investment service providers may be overestimating client understanding of many of the buzz-word concepts taken for granted in the industry.
Reported by

Dozens of asset managers and consulting firms are courting institutional investors with solutions-based approaches, yet relatively few are successfully achieving meaningful recognition for their liability-driven investing (LDI) or outsourced chief investment officer (OCIO) capabilities, according to Market Strategies International’s latest addition to the Cogent Report series.

In its new U.S. Institutional Investor Brandscape report, the business research and strategy firm suggests one-third (34%) of institutional investors are “unable to name an LDI provider they would seriously consider using,” while 59% cannot name a single OCIO provider.

Want the latest retirement plan adviser news and insights? Sign up for PLANADVISER newsletters.

Linda York, senior vice president at Market Strategies and author of the report, makes the case that this understanding barrier is clearly holding back the LDI and OCIO concepts from taking deeper root—in the defined contribution plan market especially. LDI is already “a clear favorite among corporate pensions managing to a very specific and defined liability stream,” she notes, “and many in the industry are forecasting continued interest in OCIO or fiduciary management services.”

That said, there is some serious educational work left to do among many institutional investors to ensure lasting growing in LDI or OCIO business lines, whether serving DC plans, endowments, foundations or other large-scale asset owners.

“When we prompted institutional investors with a list of 30 LDI providers, 21% of respondents who said they were interested in or currently employing LDI did not recognize any of the firms as offering LDI services,” York explains. “Moreover, when prompted with a list of 39 OCIO providers, 11% of those interested in or currently employing OCIO services did not recognize any of the firms as providers of OCIO services.”

NEXT: Time to step up the marketing game? 

York explains that, “while many firms are adding to staff and building expertise in these solutions-focused areas, few firms have yet to establish themselves as serious contenders/leaders for these services.” She believes the he next step for these firms “needs to be a concerted marketing and communication effort to boost awareness and attract new business.”

The study goes on to identify the firms that achieve the strongest recognition for their LDI and OCIO services, “many of which are already atop the leaderboard for their asset management capabilities and are leveraging these solutions-based offerings to deepen their reach with existing clients beyond the fulfillment of a particular investment mandate.”

Stacked up against names such as BlackRock, J.P. Morgan Asset Management, Wells Fargo, Vanguard, Goldman Sachs Asset Management, PIMCO and other familiar faces, York concludes that providers “seeking to break in to this lucrative yet increasingly competitive market face an uphill battle.” Still, given the relative lack of understanding of these emerging market segments among institutional investors, this may give smaller or independent firms the opportunity to differentiate themselves, “especially by touting their unique approaches to investment outsourcing and the associated benefits that clients can expect to reap.”

A summary of findings and more information on obtaining the full report is here. 

«