Social Security Can Be Understood, Maximized

Despite the 2,800 rules, benefits can be amped up with the right Social Security planning, says Financial Engines, which rolled out a planning service to help near-retirees maximize household income in retirement.

The product aims to show people what the increased benefits can look like and help them get the most out of Social Security with the right strategy. “It’s definitely an area that is being talked about among plan sponsors and plan advisers,” says Christopher Jones, chief investment officer of Financial Engines. “We’ve found it is an extremely attractive concept for plan sponsors. They recognize this is an important decision, and they’re very interested in teaching their employees more about this.”

The new population of retirees has a different set of needs, says Jones. “This is the first generation that’s retiring with significant assets in a defined contribution (DC) plan,” he tells PLANADVISER, which means the need to make a lot of decisions. First they had to accumulate assets to get to retirement, and then in the retirement phase, they need to know how to translate those assets into retirement income.

Financial Engines’ interest in retirement income is evident in one of their products, which takes the accumulated balance from a 401(k) plan and translates the assets into a sustainable income flow, almost like a mini defined benefit (DB) plan.

Recently, Jones says, several reasons sparked the firm’s interest in Social Security. “It is the foundation of most people’s retirement income plan,” he says. Nearly two-thirds of the public that takes benefits relies on Social Security for more than three-quarters of their income, which he calls a striking number. 

Social Security Is Key Piece

“It suggests that Social Security is very important for a lot of people,” Jones says, citing statistics that say half of unmarried retirees rely on Social Security for more than 90% of their retirement income. “A large portion of those unmarried folks are widowed women relying on Social Security for everything,” Jones says. “It’s all they have for retirement income.”

Decisions around how to take Social Security benefits are important and, it turns out, fairly complicated, Jones says. A typical married couple has more than 8,000 different strategies they could consider to for taking their Social Security benefits, and most people are completely unaware of this. In fact, in a recent study, Financial Engines found a huge disparity between people’s confidence levels and understanding of Social Security and their actual knowledge of the rules.

Noting that the law was last substantially updated in 1983, Jones feels there is a real opportunity for people to improve their understanding of Social Security benefits. “In the current interest rate environment, it provides a really fantastic deal for people to defer the start date of their benefits to get higher payouts in the future,” Jones says. Each year that an individual delays the start of benefits can mean an increase of 6% to 8%.

“Every year, for the rest of your life,” Jones emphasizes, “it increases with inflation: a 6% to 8% guaranteed real rate of return for every dollar you’re investing into your Social Security.” Compared with the real rates of return seen in current benchmarks, he says, which are close to zero, or three-quarters of a percent, the implication is that with the right planning, people can take advantage of a really good deal.

Some statistical factors sweeten the deal even more, Jones says. “The payouts are based on longevity assumptions and distributions for mortality that are quite old, like 40 years old,” he says. But all the actuarial information points to increased life spans, which makes the idea of deferring the start date very attractive. 

Money Left on the Table

“Unfortunately, people don’t take advantage of that,” Jones says. Most people (around 75%) claim the day they first become eligible, at age 62, or when they actually leave work. Too many think the start of Social Security should directly coincide with actual retirement, which means they forego a lot of money—as much as $100,000 in additional lifetime benefits for an individual, or $250,000 for a couple.

Instead of treating Social Security as an isolated, individual decision, Financial Engines’ Social Security service creates personalized strategies that account for multiple income sources and the realistic life expectancies of both spouses in a married household. Making Social Security into a household decision instead of an individual one is especially important to protect the financial security of the spouse who lives the longest.

Users can consider different strategies and receive a clear, personalized retirement income plan, based on Financial Engines’ patented Income+ methodology. The plan includes multiple income sources, including part-time work and pensions, and shows how retirement savings in a 401(k) or an individual retirement account (IRA) can be converted into income to help defer Social Security.

The integrated offering is available online and through Financial Engines adviser representatives to more than one million participants at 32 large plan sponsors. The interactive Social Security planner is also available at no charge to all Americans on the firm’s website.  

The incredible complexity of Social Security means most people miss out on tens of thousands of dollars in benefits because they don’t have anyone to help them figure out the best way to claim, Jones says. “By considering Social Security in combination with your 401(k), you can unlock hidden value and dramatically increase your retirement income.”

More information about the planner and service are on the website of Financial Engines