Financial advisors have long understood the importance of Social Security in their clients’ retirement plans. Now, an increasing number are using sophisticated strategies for optimizing those benefits and turning to software for help.
The trend is evident in the substantial increase in market penetration of Social Security optimization software, which jumped to 45% of advisors last year, up from 17% in 2020, according to the T3/Inside Information Advisory Software Survey. Some of that growth reflects Social Security features bundled into mainstream financial planning software, but use of stand-alone solutions is growing as well.
A separate report on technology used by independent advisors, published by Kitces.com, revealed growing use of specialized software that offers a more flexible scenario analysis and that can perform more complex planning for optimization of benefits.
“There’s been a substantial increase in awareness of the need for Social Security planning over the last few years,” said Joel Bruckenstein, a CFP and publisher of the T3 Technology Hub. “There’s been a lot more media coverage of it, and advisors are seeing that their existing clients, and potential clients, are interested.”
Most planners are familiar with the basics of Social Security claiming. It’s possible for your clients to file for retirement benefits as early as 62, but their annual benefits will be higher for every year that they delay, until age 70. Many people have a tendency to file too early. Social Security data shows that a majority of people claim by the time they reach the full retirement age (currently a bit over age 66), when they can receive 100% of their earned benefit. The more affluent people who hire planners enjoy higher-than-average longevity, which bolsters the case for delayed claiming; and they are more likely to have sufficient savings to be able to meet their living expenses while they wait to start benefits.
Software can help with those calculations and the more complex features of Social Security. There are important spousal benefit rules that can substantially boost a household’s lifetime benefits. Special rules apply to divorced people and survivors. And then there are the workers who are impacted by the Windfall Elimination Provision. This is a little-understood Social Security rule that, along with its cousin, the Government Pension Offset, can mean very sharp benefit cuts for workers who participate in public sector pension plans.
For retirees with significant savings, it makes sense to develop a tax-efficient strategy for timing their benefit claim with drawdowns from portfolios.
The T3 survey of more than 5,200 financial advisors found that many are relying on their existing software for Social Security analysis. Twenty percent of respondents mentioned the Social Security module built into MoneyGuide Pro (19%). But the second-most-mentioned software was SSAnalyzer (10%), a specialized stand-alone program created by Social Security Solutions. That company, founded by tax and retirement income expert William Reichenstein and financial services veteran William Meyer, has emerged as a leader in Social Security software for consumers, along with Maximize My Social Security, created by Boston University economics professor Laurence Kotlikoff.
The Kitces survey, which queried only independent advisors, found that 24% of advisors use financial planning software programs to analyze Social Security, with SSAnalyzer finishing a close second with 23% of the market.
But the report also points to the potential for more growth in specialized software and disruption of traditional products.
The specialized Social Security solutions stand out in their ability to deal with more complex claiming questions, says Derek Tharp, lead researcher at Kitces.com, and himself a CFP. “I think these programs really are beneficial for dealing with non-normal cases. It’s when I work with clients who have government pensions, or dealing with survivor benefits, a spousal benefit or perhaps a disability, that the specialized software is really helpful”
A newer frontier is software that can recommend optimal coordination of Social Security claims and drawdowns from portfolios. Reichenstein and Meyer are thought leaders in this area, writing a number of influential research papers and books on the topic. Their work explores the potential benefits of upending conventional drawdown strategy: namely, preserving the tax-saving benefits of tax-sheltered investments as long as possible.
Instead, their research points to the benefits of tapping tax-deferred accounts first in the early years of retirement in order to reduce the total lifetime tax burden. The idea is to use dollars in 401(k) or IRA accounts to meet living expenses, or convert a portion of these assets to Roth IRA accounts, before claiming Social Security in years when the marginal tax rate is lower than it's projected to be after benefits begin.
This approach takes advantage of Social Security's valuable delayed claiming credits, while minimizing taxes on ordinary income. It also can help avoid or minimize taxes on Social Security benefits and Medicare income-related monthly adjustment amounts levied on high-income retirees, and the net investment income surtax.
Reichenstein and Meyer offer this type of analysis to consumers with software called Income Strategy, and with a professional version called Income Solver. Both of these programs combine the company’s Social Security optimization functionality with income and tax analysis.
David Stuehling, a CFP with Konvergent Wealth Partners, based in Bend, Ore., uses eMoney for macro planning and finds it a good fit for accumulation-oriented clients. But he also is getting good results from Income Solver for some clients facing specific retirement income distribution decisions involving both Social Security and portfolio drawdowns. “Some clients are so affluent that it doesn’t really matter, but for middle-class and upper-middle income households, it’s very important,” he says.
Working with both tools does take more time, he says. “But I find it valuable to have both. Sometimes that cross-checking will turn up an assumption or data input that was incorrect.”
Indeed, Stuehling is surprised that more advisors aren't focused on coordination strategies focused on tax efficiency.
“We seem to have less influence on investments every year, but one area we can drive change as advisers, and exercise control, is tax liability,” he says. “It blows me away how little interest there is in our industry in this. We’re asset huggers as an industry and pretend we have all this influence and control on investments and rate of return. But really, this is what we should be focusing on.”