Despite the fact that many Americans haven't saved enough for retirement, the majority claim Social Security benefits at the first opportunity, substantially reducing their monthly benefit for the rest of their lives.
It seems that humans, despite our professed willingness to wait to collect a bigger reward, are hard-wired to prefer instant gratification. That's why saying no to the chocolate chip cookie now in the interest of slogging toward a 10-pound weight loss goal is so hard. Just ask me.
The emerging field of behavioral finance has documented these self-destructive tendencies and suggests ways to overcome them.
And if all else fails, a bad claiming decision still can be rectified.
GOOD INTENTIONS
Many workers say that they plan to delay collecting Social Security until the benefits are worth more, but as they approach 62 — the earliest age to collect retirement benefits — they often change their minds.
In its 2009 Retirement Confidence Survey, the Employee Benefit Research Institute asked workers when they planned to retire. The median chose 65.
In reality, the median retirement age is 62. Nearly half of retirees who responded said that they retired sooner than they had planned, sometimes because of poor health or layoffs.
In other words, individuals considering their future decision tend to think they will claim later than they actually do.
Research has shown that consumers tend to become more impulsive as retirement approaches.
When they aren't yet eligible for benefits and claiming isn't yet an option — before 62 — people may state a preference to claim later. But once they are eligible, many decide to claim early, according to research published in the 2011 issue of the Social Security Bulletin.
Simply put, those who are eligible, and know they can get that check in the mail now, are tempted in a way that ineligible people aren't.
But there may be ways to alter this inclination toward immediate gratification.
BREAK-EVEN AGE
When discussing claiming decisions in the past with your clients, you probably talked about the “break-even age” — the point at which the sum of the increase in monthly benefits derived from delaying a claim offsets the sum of the monthly benefit forgone during the delay period.
Once you reach the break-even age, you are ahead of the game, collecting more lifetime benefits because you delayed collecting. Die before then, and it would have been better to collect a smaller benefit early.
Until 2008, Social Security Administration representatives were instructed to use a break-even framework when discussing claims options with prospective retirees. But re-searchers discovered that explaining the break-even age to prospective retirees may push them toward claiming earlier by an average of 15 months.
Now that delaying benefits is becoming more accepted as a way to improve retirement security — assuming good health and a reasonable prospect of living until life expectancy or beyond — how do you convince your clients that later is better?
Focus on the positive aspects of a larger benefit, and point to research showing that tapping savings early while delaying collecting benefits can actually extend the longevity of an investment portfolio.
Of course, working longer and delaying Social Security benefits until the normal retirement age of 66 or later may be the most cost-effective solution.
What if clients have started collecting benefits and now regret it? There are fixes for that, too.
Retirees have 12 months after their initial claim to change their minds, repay the benefits that they have received and restart their benefits at a higher level later. If they have passed the one-year mark, they can still voluntarily suspend their benefits.
Let's say a client entitled to a full retirement benefit of $2,000 per month at 66 decided to collect a reduced benefit of $1,500 at 62. At 66, he or she could suspend the benefit and still earn 8% for every year between 66 and 70 in which no benefits were collected.
At that point, the monthly benefit would be worth $1,980 — nearly as much as the client would have received if he or she had waited until 66 to collect in the first place.
There are few do-overs in life, but this one can nearly erase a hasty decision.
[email protected] @mbfretirepro
