Expert Commentary

Did you take Social Security early?

Many people took Social Security earlier than they wanted because of the recession and unforeseen circumstances.

The rules let you “redo” your Social Security if it has been less than 12 months since y

ou started. Our research shows optimizing Social Security can add many years of longevity to most peoples savings. Take a “second look” and assess whether it makes sense for your to do a redo.

Behavioral Biases in Selecting Social Security

I was recently asked to provide a list of “biases” we observe related to how Americans view and start their Social Security benefits. I’m excited that “awareness” is growing about the positive impact of creating a smart strategy.  You will see some good research coming out in the this area using our work and evolving this list:

Behavioral Biases regarding claiming decision with Social Security

 1. Bias – “immediate gratification” over significant increase in “delayed gratification” (I’ll take my 1 marshmallow now versus waiting a week for 3 marshmallows)

Over 70% of Americans claim early when they can garner significantly more by crafting a strategy that leverages the rules. Many of the optimal claiming strategies involve a delay of starting benefits.  An optimal strategy for a married couple typically pays about $100,000 more in cumulative benefits than starting early.

2.Bias – Fear drives irrational behavior (the “sky is falling” so I’ll get what I can now)

The media has stirred a lot of misconceptions about the viability of the Social Security Trust and the perception that it is a “Ponzi scheme.” History and leading experts show coverage of SS benefits and easy resolutions to fix the system.  Many clients, especially those who are retiring near-term, should not be worried.

3. Bias – barriers to “financial planning” (a financial plan is for a rich person and I don’t know who to talk to)

Only 32% of Americans have a financial plan. Research shows a financial plan leads to better outcomes and greater confidence.  However, there is a barrier to plan even with a value proposition that you can find significantly more Social Security money.

4. Bias – reluctance to pay for advice (I can find the same information for free)

Many people are hesitant to pay for advice.  Some people don’t know who to trust or where to start.  Others have been trained that “free” content on the web is all they need.  A significant chasm exists between the quality of advice from free tools and general marketing lessons that don’t show a consumer exactly what to do.  Payment of a small sum can lead to a significant added amount of benefits, but we hear from prospects a reluctance to spend money on this important decision.

5. Bias – I can do better than the government (I’ll take my money early and invest my proceeds ending up with more money or I will grow my savings faster than if I drew it down to wait to get a higher SS income later)

Both financial advisors and consumers have this misconception.  A significant amount of research shows that Social Security is the cheapest annuity a person can buy.  Similarly, the 8% credits per year for a delay past full retirement age are significant. I don’t know many advisors or consumers who can find a guaranteed 8% return. We have also shown that the “reinvestment” idea misaligns risk and expected return assumptions that are typically not appropriate for someone over 55 years of age (i.e., you are not going to earn 8% when the risk tolerance expectation for a balanced portfolio is 5%).

6. Bias – never tap your principal (don’t touch your savings for as long as you can)

Many consumers believe a smart strategy is to delay tapping their savings (principal) for as long as possible.  Our research in the Journal of Financial Planning shows that using your savings while delaying Social Security from 62 to 70 can add over 10 years of longevity for someone with $200,000 of savings.

7. Bias – the self-fulfilling prophecy (finding content or a firm that tells me what I want to hear)

With the proliferation of content on the web and in social media, it is easy for an individual to find an article or firm that thinks they should take their money as early as possible. We recently had a client who was told by a Vanguard high net worth advisor that it was best for him to start as early as possible. We redid this client’s Social Security and found $127,000 more for his family. He started early because Vanguard told him to do this.

8. Bias – unwilling to consider longevity risk (I may not live that long, so I’ll start benefits early)

People are living longer, healthier lives. Yet we often hear clients say they want to start Social Security as early as possible because they may not live a long life – even though they are currently in excellent health with no concerns. These clients don’t consider there is greater than a 75% chance that at least one of them will live beyond age 83. They fail to compare the risk of living a long life against the risk of depleting their savings. Our tools allow a consumer to make a better decision about when to claim benefits based on their mortality prediction and to compare side-by-side the monthly, annual and cumulative amounts for each strategy.

Please email me if you can identify some other biases!

The reason to take benefits early, emergencies and tragedies only!

Do you really have to take your Social Security early? Below is an article from the New York Time that talks about some people being forced to take Social Security early.

There are definitely a lot of instances where Americans are forced to take Social Security early…emergencies, tragedies, personal crises, etc. However, many people who feel pinched by cash flow, but are NOT in a crises, still opt to start benefits early.

BEWARE – taking Social Security suboptimally can cost you a lot of money. I published research in the Journal of Financial Planning a month ago that showed how someone with $200,000 of savings could make their money last over 10 years longer by delaying Social Security. It’s even more for married couples. Yes, this means it is better to draw down your savings to claim Social Security later.

What’s the take away? – 1) If you have an emergency and don’t have any options, you may need to take Social Security early. But, if it is not an emergency, don’t start early! 2) Run your numbers. Make sure you understand the trade-off of starting Social Security early. Once you have your personal evaluation, you can make a good decision. Spending money to have an expert help you with this decision is well worth the thousands of dollars that are on the table.

Finally, for those that are really in a pinch, think about “Goldilocks.” Maybe you will need to start early, but even small adjustments can make a big different. Our software and advisors that use our software can come up with strategies that are “a compromise.” Again, run your numbers to see different incomes and the total benefits you can receive out of the system.