Americans Get Failing Grade on Social Security

Whenever I write about Social Security, I am inundated with follow up questions. It’s no wonder, since there are about 2,800 rules that govern the system and thousands of retirement claiming strategies. What is worrying about Social Security is NOT that it is going to run out of money (there are a number of ways to address shortfalls), but that there is so much confusion around an eighty-year-old entitlement program. According to a survey released by the Financial Planning Association and AARP, about half of Americans ages 45 to 64 expect that Social Security will be a major source of their household retirement income. But according to the Certified Financial Planners who provide advice to consumers, those numbers are way off: 94 percent of CFPs surveyed said that SS will provide 50 percent or less of clients’ retirement income.

What explains the gap between what the pros and consumers think? As the report notes, “Overall, Social Security knowledge is lacking for Americans.” Just 9 percent of consumers believe they are very knowledgeable about how Social Security benefits are determined and another 38 percent believe they are somewhat knowledgeable about how their benefits will be determined. CFP^® professionals think those numbers are high—just one percent of the planners think that their clients are very knowledgeable and 31 percent said their clients are somewhat knowledgeable.

In fact, the survey revealed that most soon to be retirees did not know the nuts and bolts of claiming strategies, like waiting to claim benefits can result in a significantly higher benefit over the course of retirement. 67 percent underestimated the impact on waiting until full retirement age to claim benefits and there was great confusion about claiming benefits on a former spouse. In fact, the vast majority of questions that I fielded about Social Security centered on claiming benefits after a divorce.

To clarify the issue, I consulted with nationally recognized Social Security expert, Mary Beth Franklin. Mary Beth writes regularly about retirement income planning, including her valuable downloadable book, “Maximizing Your Social Security Benefits”. Franklin said “The basic rule about claiming benefits on a former spouse is that you must have been married for at least ten years before you got divorced and you must be currently single, (single or widowed from a subsequent spouse). Many were concerned that claiming benefits on an ex’s record would diminish the benefit for the ex, him or herself. Not so, says Franklin.

There were also a lot of questions about whether an ex can claim retirement benefits as early as age 62. “The answer is yes, with a caveat. You can claim on your ex, but the other Social Security rules apply. That means that you would have to claim a reduced benefit (usually about 25 percent and it is permanent) on your own record and then if one-half of your ex’s benefit is greater than your own, you could collect the difference.

Here’s an example: Jack (67) and Jill (62) were married for 20 years and then divorced. Jill is currently single and would be entitled to $1,000 per month on her own record, if she were to wait until her full retirement age (FRA) of 66. Instead, she wants to claim at 62, which reduces her monthly benefit to $750.

Jack claimed his $2,500/month benefit at his FRA. If Jill had waited until her own FRA, she would have been entitled to one-half of his benefit, which would have been $1,250/month. BUT, because she is claiming at 62, her share of his benefit would also be reduced, so she would only be entitled to $875/month. (From the perspective of SS, Jill would be entitled to two benefits at age 62: her $750 + $125 from her ex-husband, for a total of $875.)

Pretty confusing, right? And that’s just one example of the intricacies of the system.

Investors are “Confused and Harmed”

Pity the poor consumer of financial services. According to The Financial Planning Coalition, a collaboration of the Certified Financial Planner Board of Standards (“CFP Board”), the Financial Planning Association® (“FPA”), and the National Association of Personal Financial Advisors (“NAPFA”), “consumers who want financial planning services are…unable to differentiate those who are truly competent to provide financial planning services from those who are using financial planning as a marketing tool.” The Coalition recently released a white paper, “Consumers Are Confused and Harmed,” which highlighted the problem. I know that you too will be shocked, just shocked to learn that the misunderstanding is not solely our fault…it has something to do with the fact that some financial service providers “are contributing to the confusion in the marketplace by identifying themselves as financial planners but not providing financial planning services.”

The Coalition points to a Cerulli study, which found that over 166,000 financial advisors self-identified as members of a financial planning focused practice, but after conducting detailed analysis, Cerulli “determined that only 38 percent of the self-identified financial planners actually had financial planning focused practices. In other words, over 100,000 financial advisors incorrectly self-identified as being part of a financial planning practice.”

Let’s think about this in another way. Let’s say that you go to the doctor to have a knee replacement and the doctor identifies himself as someone who does orthopedic surgery. Upon further analysis, you find out that the guy is a primary care physician and not a surgeon. You sure would have liked to know that fact, before you went under the knife, right?

According to Kevin Keller, the CEO of the CFP Board “American consumers looking for financial planning services face an uphill battle when it comes to identifying a competent, ethical financial planner. Just as consumers expect a medical doctor to have an M.D., a lawyer – a J.D., an accountant – a CPA, they should expect their financial planner to demonstrate expertise, experience, and accountability, and be held to standards the public can understand and trust.”

Here’s the problem: there is NO uniform regulation of financial planners, which would ensure that our expectations are met. In 2011, the SEC’s “Study on investment advisers and broker-dealers advocated that the “fiduciary standard” be applied to the industry. A fiduciary duty means that a financial professional must put your needs first. (CFP® professionals are held to the fiduciary duty.) Those who aren’t fiduciaries are held to a lesser standard, called “suitability,” which means that anything they sell you has to be appropriate for you, though not necessarily in your best interest. The SEC has noted, “most [investors] are unaware of the different legal standards that apply to their advice and recommendations…and expect that the recommendations they receive will be in their best interests.”

The coalition’s white paper corroborates the SEC: “A full 82 percent of consumers believe that a financial planner is essentially the same as a financial advisor, and there is only slightly less confusion between the titles financial planner, wealth manager and investment advisor.” And the vast majority of those who are held to the suitability standard would like to keep you mired in confusion. That’s why SIFMA, the industry’s lobbying arm, has spent millions of dollars to prevent the fiduciary standard from becoming law.

Lauren M. Schadle, CEO/Executive Director of FPA cuts to the chase: “It’s really pretty simple. Consumers who seek integrated, financial planning and receive narrow advice or one-product solutions with their life savings are harmed by the lack of appropriate regulation…time and time again, consumers are misled and harmed by those who simply use the moniker ‘financial planner’ as a marketing tactic but fail to deliver actual financial planning.” NAPFA CEO Geof Brown adds that the current environment can lead consumers to purchase “investment or insurance products that are inappropriate for them.”

What’s the fix? Until the government adopts the fiduciary standard, your best bet is to come right out and ask any potential or current financial professional, “Are you a fiduciary?” If not, you may want to find someone who is.

Here are three resources to find fiduciary advisors:

• FPA Planner Search
• NAPFA Fee Only Advisors
• CFP Board Find a CFP Profesional

Procrastination Nation

Last month, I had the privilege of interviewing productivity guru David Allen, who wrote a seminal work on the topic called “Getting Things Done: The Art of Stress-Free Productivity”. At the Financial Planning Association’s Annual Conference, David captivated 1,800 CFP® professionals with a terrific explanation of how easily we can be distracted and the best way to find focus and vision. I thought about David after trying to conduct research on why people procrastinate. It’s not that we are inherently lazy, and according to Joseph Ferrari, a professor of psychology at DePaul University, “It really has nothing to do with time-management…As I tell people, to tell the chronic procrastinator to just do it would be like saying to a clinically depressed person, cheer up.”

Ferrari has found that as many as 20 percent of people may be chronic procrastinators and it causes them stress, a drop in overall well-being and not surprisingly, it can cost them money too -- think late fees on credit cards, which add up to billions of dollars annually; filing taxes at the last minute, which prevents many from claiming many deductions to which they are entitled; and of course, failure to save for retirement, which can create financial problems in the future.

It’s not that procrastinators don’t know what to do—they understand that they really should track their expenses or draft a will, but they can’t bring themselves to do it. Ferrari says that some procrastinators avoid making financial decisions due to a psychological reluctance to be held responsible for a decision. Perhaps one spouse avoids all of the financial and investment decisions not because he or she “isn’t good at that stuff”, but the uninvolved spouse wants to retain the right to second-guess the money-managing spouse later!

How can procrastinators bridge the gap between intention and action? David Allen says that part of the problem is that all of the things we have to do are rattling around our brains, causing us to drive ourselves a little crazy. He notes, “Until you see yourself doing it, you won’t see how to do it”.

The good news is you can actually change your attention and focus by firing your neurons to be sensitive to the tasks that need addressing. Allen’s system starts by capturing all the things that need to get done; imposing discipline so that you are in control; and then creating a plan for next actions. Once you get the stuff out of your brain and write it down, you need to schedule time to check in on your progress. It can help to do this at the time of day when you have the most energy. Also, when you are addressing those hard-to-accomplish tasks, try to limit distractions. I know that may sound nearly impossible in our hyper-connected world, but for some chunk of time, remove audio and visual alerts of new messages, do not log into social media and avoid opening too many windows on your browser.

According to experts, pre-committing to goals can help. You can start by making a public declaration, because your friends and family can help you stick to your pledge. “We know from research that you are more likely to do something if you publicly post it,” Ferrari says.

There are also some concrete steps to take in your financial life, like establishing automatic deductions from your paycheck to a savings account, enrolling in a retirement plan and setting up auto-pay on as many bills as possible. If you think you need professional help, schedule that appointment and keep it!

Ferrari advises rewarding yourself for completing that to-do. It’s fun to share your accomplishment with one of your cheerleaders (spouse, parent, pal); spending extra time with your kids, your friends; or giving yourself a mental break by doing something physical. Finally, you can also treat yourself by spending small dollars on something…after all, you’ve earned it!