Expert Commentary

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!

New research shows SS is the cheapest annuity you can buy, and we agree!

Quoted in the news today – new research is out on Social Security. The take away is that it “pays” to create a smart strategy…sound familiar.

The twist is that the authors use different terminology and relate Social Security to an “annuity.” Yes, it is like an annuity…but, a cheap one. The point of the article is that with low interest rates it is the cheapest annuity you can buy.

The implication is 1) you should maximize your benefits and 2) figure out how to withdrawal your other savings to maximize benefits which will result in your money lasting longer.

Overall, this is consistent with my research published in the Journal of Financial Planning 2 months ago. We showed we could make someone’s money last 2 to 10 years longer by optimizing Social Security.

People, this is a “no brainer” decision. However, the implementation is hard. Make sure you don’t cut a corner to figure out your strategy since you will likely have a lot more money.

http://www.marketwatch.com/story/with-rates-low-it-pays-to-delay-social-security-2012-07-12?link=MW_Nav_PF

New research from us in the Journal of Wealth Management. Low interest rate environment impacts claiming decisions.

New important research from us – Today I received my Journal of Wealth Management. You can see the article abstract attached below.

I’m impressed as it is the prettiest journal, wrapped in plastic, and printed on thick paper. Most importantly, I think it is the premier journal in financial services. The editor is Jean Brunel who is the famous former Chief Investment Officer at JP Morgan years ago and trustee of the CFA research institue. The research is for a investment managers and technical. Mostly geared to advice and strategies for the ultra rich.

Look for our next working to come out soon directed to help Government Employees and Teachers. I think it is the best work I have ever done. Our software includes the logic which rolled out over the weekend. I’ll share more about this later as a lot of good things are coming to life.

I’m very proud to have our work accepted here.

http://www.iijournals.com/doi/abs/10.3905/jwm.2012.15.1.012