Huge gap in public's knowledge of Social Security rules

Difference between claiming strategies could be as much as $250,000 for a married couple

Mar 11, 2014 @ 12:01 am

By Mary Beth Franklin

There is a huge gap between what most Americans think they know about Social Security and the actual rules governing the nation's primary retirement program, according to a new survey released by Financial Engines on Tuesday.

As a result of this knowledge gap, the typical retiree leaves as much as $100,000 in lifetime benefits on the table. For a married couple, the difference between a smart claiming strategy and the urge to grab the money as soon as possible could be $250,000 or more over their joint lifetimes, the survey found.

“Social Security is the linchpin of retirement income for the vast majority of households,” said Christopher Jones, chief investment officer of Financial Engines, the largest provider of managed accounts for employer-based defined contribution plans. Over the past few years, Financial Engines has branched out into managing retirement income plans for participants and is looking to add new features.

As part of the online survey conducted last fall, Financial Engines asked more than 1,000 near and current retirees eight questions about claiming Social Security benefits. Of those respondents who have not yet claimed Social Security, 74% scored a grade C or lower. Only 5% were able to answer all eight questions correctly.

“Our survey clearly shows this decision is more difficult than most people believe,” Mr. Jones said. “There are few financial planning decisions that can have such a dramatic impact on the standard of living in retirement.”

In addition to identifying some costly knowledge gaps, the survey found high interest in getting help with selecting the right household claiming strategy. Seven in 10 near-retirees who have not yet claimed Social Security said they would be at least somewhat interested in a service provided by their employer to help them develop a household claiming strategy. Of these, 39% said they would be extremely or very interested in this type of Social Security claiming help.

Mr. Jones noted that the government does not have the resources to appropriately educate every individual who needs better information to make an informed decision about when to claim Social Security.

“Financial advisers are best suited to help people understand how to put the building blocks of a retirement plan together, such as Social Security, retirement savings and, for some people, continued employment,” he said.

“In the current environment, people may be better served by tapping their savings in order to defer Social Security as long as possible,” he added. “There is no better deal to be found than the 6% to 8% risk-free return the government is offering for every year you postpone collecting benefits between 62 and 70.”

While a financial adviser may be able to improve a client's portfolio returns by 100 to 200 basis points through appropriate investment selections and diversification, Mr. Jones said guiding clients to a better Social Security claiming strategy could increase their lifetime income by 25% or more.

Financial Engines' research found more than 8,000 possible Social Security claiming strategies for a married couple when all of their options to claim benefits between 62 and 70 — based on their own earnings record or as a spouse, as well as the possibility of stopping and restarting their benefits, are considered.

But I don't think Social Security claiming rules are quite as confusing as that mind-boggling statistic would suggest. Just keep in mind my simple mantra: "66 is the magic age.”

(See: Getting the most from Social Security benefits)

Although your clients can claim Social Security benefits as early as 62, their benefits will be permanently reduced, they will be subject to earnings cap restrictions if they continue to work and they will forfeit the ability to engage in creative claiming strategies that could boost their lifetime income.

Remember, you must be at least full retirement age — currently 66 — to file and suspend your benefits or to restrict your claim to spousal benefit only. Each person can choose only one claiming strategy.

If you missed my March 4 webcast on “The Many Uses of File and Suspend” you can listen to an archived version.

And if you want to learn more about Social Security claiming strategies and have the chance to ask me your questions in person, consider attending the InvestmentNews Retirement Income Summit in Chicago on May 12-13. Attendees will receive a free copy of my new Social Security handbook for financial advisers.

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