When to begin receiving Social Security benefits is one of the most important (and stressful) decisions many retirees must make. Experts generally agree that the majority choose much too early, forgoing more income when it’s needed most, which is later in life.
We know waiting until age 70 to claim benefits, or four years past the full retirement age used for actuarial purposes will result in 132 percent of the monthly benefit.
Added to recipient confusion is exactly how they should draw down assets—is earlier better, or should the 401(k) be exhausted first?
The answer usually is a maddening “it depends …” but a new issue brief from the Center for Retirement Research at Boston College aims to make it all a bit easier.
CRR head Alicia Munnell, together with Gal Wettstein and Wenliang Hou, note the decision’s complexity and the difficulty for the average investor to decide what’s best.
Like something Nobel Laureate Richard Thaler previously discussed, one idea would be to use 401k proceeds to purchase an annuity to ensure a guaranteed, fixed amount for retirement’s duration. Yet the author’s note retirees have typically “shunned immediate annuities, which pays a fixed amount for life, or even an advanced life deferred annuity, which begins payments at a later age.”
A more effective concept is a “Social Security bridge,” which they argue is a way to further defer Social Security benefits to a later age to thereby maximize the amount received.
“Introducing such an option as the default in 401k plans would require no legislative or institutional changes and would greatly enhance the welfare of participants,” according to the issue brief.
Their proposal would introduce a default into 401k plans that would “use 401k assets to pay retiring individuals ages 60-69 an amount equal to their Social Security PIA – the monthly benefit at an individual’s full retirement age.”
Replacing Social Security in early retirement years with this type of temporary income stream would “break the link between retiring and claiming. As a result, retirees could delay claiming Social Security in order to maximize this valuable source of annuity income.”
Emotional barriers
Not that it would be easy, and many experts agree that the emotional aspect of spending from the 401k first, something to which workers diligently and purposefully contributed, rather than Social Security, which is viewed as a tax and rarely noticed, could act as a barrier.
Nonetheless, the authors conclude, “Introducing a Social Security bridge option within a 401k would not require any new legislation or any new formal bureaucratic structure, nor does it involve contracting with an insurer. It is a mechanism to significantly improve the welfare of 401k participants at no cost to society.”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
