Deciding when to file for Social Security is no simple task, and most Americans don't handle it well. But increasingly, help is available from an unexpected source: your employer.
The nation's largest independent investment advisory firm is rolling out a service today that walks 401(k) plan participants through their Social Security claiming options, with the aim of helping them maximize benefits. Financial Engines, which works with company retirement plans, will show participants how to integrate their Social Security income plan with drawdown from retirement savings. The service includes an online tool and optional one-on-one guidance from advisers.
This isn't the first service of its type, but Financial Engines' large presence in workplace plans means the service will be available immediately to 9 million 401(k) savers. Meanwhile, a more limited free version of the Social Security claiming tool—lacking integration and one-on-one advice—is available on the company's website.
Integrating robust Social Security planning tools into 401(k) plans is a positive development. Social Security is the most important retirement benefit for most Americans, but most of us leave big dollars on the table in lifetime income by failing to pick the optimal filing strategy.
"Coordinating 401(k) savings with Social Security is a big part of the retirement planning puzzle," says Brooks Herman, head of data and research at BrightScope, which ranks and analyzes 401(k) plans. "More companies will be moving into this space—there's a real need for robust tools."
Timing is the key issue in Social Security claiming decisions. Benefits are calculated using a formula called the primary insurance amount, or PIA. Claimants who wait to start Social Security until their full retirement age (currently 66) receive 100% of PIA; taking benefits at 62, the first year of eligibility, gets them 75% of PIA. By waiting until age 70 (the maximum year for delayed filing credits), they'll receive 132% of the PIA. And those benefits are enhanced by an annual cost-of-living adjustment, which is added in for years of delayed filing.
Filing later means higher annual income for life, which can be a great hedge against the risk of running out of money in old age. Couples can boost their combined benefits further by executing a file-and-suspend strategy.
"It's a screamingly good deal," says Christopher Jones, Financial Engines' chief investment officer. "There's a 6% to 8% increase in payout for every year you defer up to age 70—that's a real rate of return guaranteed by the federal government. Very few investments out there can match it."
Yet 40% of Americans file at age 62, and another 40% file sometime before their full retirement age, according to Social Security Administration data. Filing early isn't always the wrong move; it can make sense if you're in poor health and don't expect to live long, or if you simply need the money. But studies have shown that early claiming is most often tied to incorrect expectations about longevity and misunderstandings about the risk that Social Security will run out of money and not be able to pay benefits.
The public already has access to some solid Social Security claiming decision tools. AARP, T. Rowe Price and the Social Security Administration offer free tools, and SocialSecuritySolutions.com can help you out for a small fee. But the workplace is where the rubber most often hits the road when it comes to retirement planning.
GuidedChoice, which competes with Financial Engines in the 401(k) advisory market, already has a Social Security optimization feature coupled with one-on-one advice. Morningstar, another player in the field, doesn't offer Social Security optimization yet but plans to add it, a spokeswoman says.
Financial Engines' offering begins with a projection of likely nest egg size at retirement, followed by an illustration of how savings can be converted to income-oriented investments that generate income to meet living expenses while waiting for Social Security to begin—and how the strategy results in higher lifetime income.
The illustration aims to help people get over a key psychological hurdle, Jones says. "Retirees are reluctant to spend all of their savings, or even a large fraction up front," he says. "They see their accumulated balances as a safety net, so they're reluctant to spend that down too quickly."
So, how much is it worth to optimize your benefits? Financial Engines has been testing its new service over the past three months with a few large corporate clients; the median amount of additional benefits found for a typical married couple over the course of their retirement has been well over $100,000.
A screamingly good deal, indeed.