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Building a Bridge

Richard Connor

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.

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Catherine
Catherine
9 months ago

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.

Randy Starks
Randy Starks
9 months ago

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.

Rick Connor
Rick Connor
9 months ago
Reply to  Randy Starks

Excellent point about the tax implications. It was not addressed in the research.

Patricia shmidheiser
Patricia shmidheiser
9 months ago

Save receipts and use an HSA as a bridge.

Rick Connor
Rick Connor
9 months ago

That was part of our plan, but it turns out we’ve been reasonably healthy and have not accumulated a lot of medical receipts. We’re using my wife’s HSA to pay any deductibles in our current HDHP.

steveark
steveark
9 months ago

I guess I fail to see a problem here needing a solution. Anyone can draw bridge money out of a 401K starting at 59.5 years of age. Then they can stop drawing it at full retirement age or at age 70 when they take SS. I don’t see why any changes are needed in the 401K structure to accomplish it. This is exactly what I’m doing now until I hit 70. Its simple already.

Steve Spinella
Steve Spinella
9 months ago

How to motivate ourselves or others to make good choices is an interesting, but frustrating question. Motivation hinges not on the facts, but the impacts. For me, it has been an underattended science.

Nick M
Nick M
9 months ago

I’m confused about this statement: “you’d receive $1,900 a month at age 62.” Wouldn’t it make more sense to receive $1,500 at age 62, and then grow that each year, hitting $1,900 at age 65?

Also, anyone can already create a social security bridge with cash and bonds, so I don’t see the point in having a service do it for them. Each year, look at your SS benefit, then withdrawal that amount from savings in addition to your preferred retirement withdrawal. Upon claiming SS, stop making the extra withdrawal. For anyone with sufficient assets, the few years of extra withdrawal should be a non-issue. For anyone without sufficient assets, they would likey need to take SS early regardless of the mental framing used.

In either case, having money “dedicated” to income seems like a bad idea, unless in can be easily “undedicated” as well, in which case it seems likely people wouldn’t stick with the plan. People may go in and out of part time employment during retirement, varying the need for extra income, so why not just assume people can figure out for themselves when they need additional income from retirement accounts? Instead, simply telling employees that it’s a good idea to use retirement assets to delay SS seems sufficient.

Rick Connor
Rick Connor
9 months ago
Reply to  Nick M

Nick, thanks for the comment. I was also surprised they used the $1900 in their example, and thought starting with $1500 made sense.But’s that’s what the paper said. Possibly they wanted to kept simple, or maybe a an enticement.

You are correct that you could do this on your own, but there are lots of very competent people who simply have no interest in managing investments. I worked over 40 years with “rocket scientists” and there was a surprising number who simply had no interest an were happy to get a professional handle their investments.

I have to admit that I’m quite happy I’m one of the lucky ones who receive a nice defined benefit pension every month. It’s comforting to know a significant part of our income is on auto-pilot.For the rest of our income I’ve set up auto-withdrawals from Vanguard with cash/bond funds as you suggested.

Jonathan Clements
Admin
Jonathan Clements
9 months ago
Reply to  Nick M

If simply telling folks that something is “a good idea” was sufficient, we’d all eat healthily, exercise regularly, save diligently and invest prudently!

Nick M
Nick M
9 months ago

For anyone not saving diligently and investing prudently, wouldn’t this entire article be meaningless? The article didn’t say people saved more of their income when given this option, it asked how much of their existing 401k they would be willing to allocate to this product. Also, simply withdrawing more money from an account would be far easier than going to the gym, so I don’t get the analogy.

Last edited 9 months ago by Nick M
Jim Mahaney
Jim Mahaney
9 months ago

Readers may find it of interest that I created the idea of an Income Bridge using 401(k) or IRA savings to generate a higher Social Security benefit. Back in the early 2000s, I was asked by my employer at the time to help come up with a product to help workers retire from 401(k) plans with more security as defined benefit plans faded away. At the time, the financial community’s conventional wisdom was to always defer taking IRA distributions until later in retirement and to typically take SS as soon as one retired. However, I thought that this was not the best strategy for the average retiree…….Notably, my retired father lost a lot of my mother’s IRA wealth in the early 2000s bear market and it was eating him alive. SS not only has inflation protection that couldn’t be duplicated in the private sector but had a survivor benefit few talked about (Jonathan did). At the time, no one talked about how spouses should strategize together to create the optimal SS claiming strategy. In addition, changes set forth in 1994 for SS were about to really kick in. Chiefly, Delayed Retirement Credits were to bump up to 8% per year whereas before they were in the 5% range. I also did a deep dive into the SS rules and discovered that due to a change made under President Clinton to eliminate the Earnings Test after FRA, an individual could file for benefits (at or after FRA) triggering the eligibility of a spouse to file for a spousal benefit and the worker could immediately suspend his benefit. I named it “File and Suspend”.

A young actuarial trainee came to work under me and he was able to design an Excel modeling tool to prove the concepts. He added greatly to the ideas…We put together an annuity product that could be designed to create a customized cashflow to bridge from retirement until delayed SS kicked in. It allowed for the spouse’s worker and/or spousal benefit to be integrated into the strategy. We wrote a paper and it was published by the Pension Research Council at Wharton. Jonathan wrote about the launch in 2006 when he was at the WSJ. Needless to say, the product failed and I probably made it too complicated as I brought in the significant tax savings that many households would find if they took the income bridge approach. That said, the research paper made the rounds and John Sloven at Stanford and Alicia Munnell at Boston College’s Center for Retirement Research, William Reichenstein at Baylor (and others) took the concept and wrote about it and advanced the research further.

“File and Suspend” was killed under the Obama Administration as it was deemed a loophole. That said, the concept did help more retirees consider the tremendous value of delaying SS to provide for a surviving spouse.

I recently retired from that employer and am working in a start-up to provide employers with a 401(k) rollover platform that will allow individuals to see the value of “bridging” to delayed SS if they choose along with using low-cost index funds to invest and generate income as needed. We also hope to provide a commission-free immediate annuity or QLAC for the few who wish to generate more guaranteed lifetime income. Right now, that product doesn’t exist in the insurance industry but I feel strongly that it is needed…I don’t feel employers (plan sponsors) are willing to change their 401(k) plans to have the “income bridge” in their plans, but perhaps they will allow it outside their plans as a low-cost IRA rollover option which is part of a grander retirement income plan. After all these years, I still believe SS should be the core foundation of many retirees’ retirement income plans, especially with our low interest rate environment, the ongoing potential for future inflation, and the increased longevity of affluent retirees.

Nick M
Nick M
9 months ago
Reply to  Jim Mahaney

Anyone with sufficient bond and cash assets can simply check online for the annual benefit amount they could have received from SS, and instead make an additional retirement account withdrawal for that amount. Upon claiming SS benefits, they simply stop taking the extra withdrawal. Anyone without sufficient retirement assets to do this, certainly can’t afford to purchase an annuity either, regardless of how commission-free it is. Simply informing employees that it’s a good idea to use retirement assets to delay SS, should be equally effective at accomplishing the result, without introducing superfluous financial products.

Rick Connor
Rick Connor
9 months ago
Reply to  Jim Mahaney

Jim, thanks for the fascinating reply. I was sad when “file and suspend” wa killed before I got to try it. I would love to follow your work on developing low cost annuities. My years with AARP TaxAide has convinced me there are many lower and middle income retirees who would benefit from a safe, low-cost annuity.

R Quinn
R Quinn
9 months ago

Richard, I think all the research and strategies for maximizing SS miss an important point. Many – most – retirees don’t actually have a choice of delaying SS as they need the income. In addition, a number of retirees also don’t have a choice of when they “retire.”

The strategy of using the 401k to delay SS is fine, if they have sufficient 401k funds, but the data indicate many don’t have significant balances to get them through retirement.

Sometimes academics need to consider the real world.

Jeff
Jeff
9 months ago
Reply to  R Quinn

You are right on! These book learned bean counters need to experience real life.

Rick Connor
Rick Connor
9 months ago
Reply to  R Quinn

Richard, thanks for the comment. I consider most of these SS claiming analyses to be “optimization studies”. I enjoy them form a technical/mathematical standpoint. If you have lots of assets you can do what you want and it won’t much matter. But I understand you can’t optimize what you don’t have. If someone needs their SS, they may have no other choice. But as you have written that is more a case of readiness for retirement.

I think these studies may have application to people in the middle, who have modest savings, but don’t want to touch them, so they turn on SS early. They might benefit long term from a bridge.

I read a 2020 article in US News recently that said about 50% of people claimed at 62 in 2005. In 2018 it was down to about 30% So it seems more people are considering delaying.

wtfwjtd
wtfwjtd
9 months ago
Reply to  Rick Connor

The thing is, people claiming SS at 62 in 2005 didn’t take nearly as big a haircut in benefits as those claiming at 62 in 2020, so this don’t feel like an apples-to-apples comparison. Nevertheless, I do agree that claiming later is a more prudent strategy for most people, if they have the luxury of actually choosing that is.I’d say the “bridge” concept is most useful for folks who don’t have enough assets to sustain a longer retirement, but have enough to purchase a short-term annuity. Thing is, a lot of these folks believed their whole lives that SS will be “bankrupt” and they won’t be able to draw it when it’s their turn, and it’s hard to let go of both their cash and their long-cherished belief about SS at the same time. It’s a tough conundrum, and by the time they realize they would have been better off waiting, it’s too late to do anything about it.

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