Giving Up Free Money

Giving up free moneyFor most Americans, their Social Security benefits are a critical component in successfully achieving their planned retirement. While Social Security should not be the primary retirement income source, it fills a critical gap in helping retirees achieve the 70-85% income replacement that is commonly assumed in our industry.

Because it is so critical, I was particularly troubled (although I can't say surprised) by a recent article (free registration required) in InvestmentNews highlighting a study conducted for Nationwide Financial. Shockingly, this study finds that only 15% of women wait until full retirement age to claim their Social Security benefit. The vast majority of respondents to the survey claimed their benefit early, foregoing the built in annual increases that come with waiting until full retirement age, or waiting further until age 70 to get the maximum benefit.

The survey results are troubling due to the impact they have on those individuals' financial well-being, but also concerning because they highlight a large gap in our industry’s communication and education strategies. For most individuals, Social Security is the best source of longevity insurance in retirement. They receive a lifetime benefit with an annual cost of living adjustment. This is of great value to defined contribution participants who are otherwise left on their own to manage retirement savings in a way which balances current income needs, while keeping sufficient principle in order to never outlive their savings. To replicate their Social Security benefit in the private market would take hundreds of thousands of dollars in retirement savings.

The non-optimal behavior the survey results describe is at least partially attributable to failure on the retirement industry’s part to provide better education and communication tools for retirees. Unfortunately, in my experience, most of the education and communication strategies are focused on the benefits of saving in a 401(k) or 403(b) plan and how you should invest. Advisers generally expend energy and resources trying to turn young employees into optimal savers and investors, while providing little in the way of resources to individuals nearing or entering retirement. Additionally, when advisers do provide resources on this topic, the focus is often limited to the narrow silo of the employees’ retirement account, when a broader analysis could dramatically improve financial wellness. 

I believe we are better served as an industry, and as plan sponsors, to make plan design and investment menu decisions that ease the decision to successfully enroll and invest in the plan. This can be done by implementing automatic enrollment, automatic escalation, and default investment strategies that eliminate the friction to starting in the plan. With the time and resources saved from no longer trying to educate everyone as to why they need to use the plan, we can re-target our education and communication messaging to helping participants transition into retirement.

Finally, the study also highlights the need for our industry, and plan sponsors, to do a better job broadening the retirement planning discussion. The byproduct of poor decisions regarding a participant’s Social Security benefit is that the participant is more reliant on the organization’s retirement plan to provide their retirement income. If employers are better able to help participants maximize their Social Security benefits it would improve their participants’ retirement security and lower the threshold for participants to clear in order to be able to retire.

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