Deciding when to file for Social Security is no simple task, and
most Americans don't handle it well. But increasingly, help is
available from an unexpected source: your employer.
The nation's largest independent investment advisory firm is rolling
out a service today that walks 401(k) plan participants through
their Social Security claiming options, with the aim of helping them
maximize benefits. Financial Engines, which works with company
retirement plans, will show participants how to integrate their
Social Security income plan with drawdown from retirement savings.
The service includes an online tool and optional one-on-one guidance
This isn't the first service of its type, but Financial Engines'
large presence in workplace plans means the service will be
available immediately to 9 million 401(k) savers. Meanwhile, a more
limited free version of the Social Security claiming tool - lacking
integration and one-on-one advice - is available on the company's
Integrating robust Social Security planning tools into 401(k) plans
is a positive development. Social Security is the most important
retirement benefit for most Americans, but most of us leave big
dollars on the table in lifetime income by failing to pick the
optimal filing strategy.
“Coordinating 401(k) savings with Social Security is a big part of
the retirement planning puzzle,” says Brooks Herman, head of data
and research at Brightscope, which ranks and analyzes 401(k) plans.
“More companies will be moving into this space - there’s a real need
for robust tools.”
Timing is the key issue in Social Security claiming decisions.
Benefits are calculated using a formula called the primary insurance
amount, or PIA. Claimants who wait to start Social Security until
their full retirement age (currently 66) receive 100 percent of PIA;
taking benefits at 62, the first year of eligibility, gets them 75
percent of PIA. By waiting until age 70 (the maximum year for
delayed filing credits), they'll receive 132 percent of the PIA. And
those benefits are enhanced by an annual cost-of-living adjustment,
which is added in for years of delayed filing.
Filing later means higher annual income for life, which can be a
great hedge against the risk of running out of money in old age.
Couples can boost their combined benefits further by executing a
file-and-suspend strategy. (More detail: http://reut.rs/1ePEqXg)
“It’s a screamingly good deal,” says Christopher Jones, Financial
Engines’ chief investment officer. “There’s a 6 to 8 percent
increase in payout for every year you defer up to age 70 - that’s a
real rate of return guaranteed by the federal government. Very few
investments out there can match it.”
Yet 40 percent of Americans file at age 62, and another 40 percent
file sometime before their full retirement age, according to Social
Security Administration data. Filing early isn't always the wrong
move; it can make sense if you're in poor health and don't expect to
live long, or if you simply need the money. But studies have shown
that early claiming is most often tied to incorrect expectations
about longevity and misunderstandings about the risk that Social
Security will run out of money and not be able to pay benefits.
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The public already has access to some solid Social Security claiming
decision tools. AARP, T. Rowe Price and the Social Security
Administration offer free tools, and SocialSecuritySolutions.com can
help you out for a small fee. But the workplace is where the rubber
most often hits the road when it comes to retirement planning.
GuidedChoice, which competes with Financial Engines in the 401(k)
advisory market, already has a Social Security optimization feature
coupled with one-on-one advice. Morningstar, another player in the
field, doesn't offer Social Security optimization yet but plans to
add it, a spokeswoman says.
Financial Engines' offering begins with a projection of likely nest
egg size at retirement, followed by an illustration of how savings
can be converted to income-oriented investments that generate income
to meet living expenses while waiting for Social Security to begin -
and how the strategy results in higher lifetime income.
The illustration aims to help people get over a key psychological
hurdle, Jones says. "Retirees are reluctant to spend all of their
savings, or even a large fraction up front," he says. "They see
their accumulated balances as a safety net, so they're reluctant to
spend that down too quickly."
So, how much is it worth to optimize your benefits? Financial
Engines has been testing its new service over the past three months
with a few large corporate clients; the median amount of additional
benefits found for a typical married couple over the course of their
retirement has been well over $100,000.
A screamingly good deal, indeed.
(Follow us @ReutersMoney or at http://www.reuters.com/finance/personal-finance.
Editing by Douglas Royalty)
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