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WHAT IF WE MADE IT easier to delay Social Security, so more retirees ended up with a larger monthly check?
Last year, I wrote about a study from Boston College’s Center for Retirement Research (CRR) that detailed the value in claiming Social Security later. A new CRR paper examines the topic further.
The paper describes a survey of those nearing retirement. The goal: to gauge interest in using a 401(k) “bridge” to generate income while folks delayed claiming Social Security. The bridge was pitched as a new feature of 401(k) plans. A portion of participants’ 401(k) savings would be dedicated to paying regular monthly income until they started their Social Security benefit. In essence, they’d be using 401(k) dollars to buy a higher Social Security payment. For each year folks delay, those benefits increase by some eight percentage points above the inflation rate.
The idea that retirees might use savings to pay living costs, while allowing their Social Security benefit to grow, isn’t new. What’s new about the 401(k) bridge is that it would be an additional, automated option within 401(k) plans.
The paper provides a simple example. Assume you’re eligible for a $1,500-a-month Social Security benefit at age 62. Waiting until 65 to claim would provide an increased benefit of about $1,900. If you elected a 401(k) bridge, you’d receive $1,900 a month at age 62, or $23,000 per year, from your 401(k). At 65, that monthly payment would stop and you’d claim your $1,900 Social Security benefit.
The research was structured to gauge people’s interest in this unfamiliar option, if the way the option was framed made a difference, and how much of their 401(k) they’d be willing to allocate. In general, no more than a third of respondents showed interest in the bridge option. The authors cite TIAA data showing that this share is consistent with the number of people who choose annuities when retirement plans offer lifetime-income options.
In the CRR study, when the 401(k) bridge was framed as “income insurance,” there was a small but significant increase in interest. The other framing technique that increased interest: making the bridge the default option. Having to opt out, as opposed to opting in, increased enrollment.
If the goal is to maximize one’s monthly Social Security benefit, once begun, It would be useful if employers had a bridge product/structure to offer, or if employees knew how to do this for themselves. Not just for the over-62 crowd, but at least down to 59 1/2 when 401k withdrawals become available without penalty. People take early retirement for many reasons, and if they don’t have a paycheck, they need something else. Having worked on several “reduction in force” initiatives, there’s always a discussion on how to incentivize or assist employees who feel almost ready to retire, so that a firm won’t have to resort to involuntary layoffs.
One item that’s under-discussed in most “wait till 70” discussions, the likelihood that any particular person believes he/she will die earlier than expected, possibly before reaching age 70. Even if a person is incorrect in self-assessment, it will affect decision making. Simply telling people to plan to live to 95 is not helpful. Well over half of us won’t last till then, and from what I’ve read, life after 90 for most doesn’t involve much fun travel or other discretionary spending. All after-65 years aren’t the same.
Also, per the 2019 Federal Reserve SCF, there’s only $134,000 in the median retirement savings of someone aged 55-64 (the decision point for pre-FRA Social Security filing). Withdrawing $23,000 a year, that 401k would be completely emptied before reaching age 70. People have been advised all their working lives not to rely solely on Social Security, that one “leg” of a retirement stool is personal savings, so using that money as a bridge would seem an error.
This is interesting; however I feel, you would have to tax those 401k benefits like social security payments. That is, less than 100% taxable, just like SS payments are now. Now, when you incentivize folks based on taxes, I guarantee the results would be different. Just has to be explained to the un-informed.
Excellent point about the tax implications. It was not addressed in the research.
Save receipts and use an HSA as a bridge.