When it comes to saving for retirement, everyone is mostly on the same page.
The financial services industry wants you to save money for retirement. Employers want you to save money. And you want to save money. Everyone’s interests are aligned.
But when it comes time to turn savings into income, the incentives aren’t quite as aligned, according to Suzanne Bliven Shu, the dean of faculty and research at Cornell University’s SC Johnson College of Business. Asset managers don’t want to see retirees pulling money out of their accounts. Employers regard retirees as no longer their problem. And retirees are drastically different from one another. Some are in good health with a long life expectancy. Some are in poor health with a short life expectancy. Some want to keep working while others are physically unable to do so.
What you have, according to Shu, is vast heterogeneity in what people’s needs are. “It’s not as clear as it is in retirement savings that you can put a nudge in place to push everybody in the same direction and that’s the right direction,” she said in an interview. “It’s very individualized.”
That’s why it’s hard to say that there are mistakes being made. “A mistake for one person is not necessarily a mistake for another person,” said Shu.
Still, mistakes are being made that are easily avoided or corrected.
Don’t claim Social Security early
Many older adults are claiming Social Security too early, according to Shu. An economist or statistician might, for instance, expect to see a normal distribution of people claiming around full retirement age. But that’s not what’s happening.
For instance, 48% of women and 42% of men who claimed retired-worker benefits in 2013 were age 62, after excluding beneficiaries who switched from disability benefits to retired-worker benefits at age 66, according to Trends in Social Security Claiming, a report published by the Center for Retirement Research at Boston College.
And, the next most popular claiming age was the full retirement age (FRA), which was 65 until 2003 and gradually increased to 66 for workers turning 65 in 2008. That means 27% of women and 34% of men claimed benefits at the FRA. The other age groups individually account for a much smaller percentage of initial benefit awards.
This “tilted distribution” suggests that some people are probably making mistakes, said Shu. Now, it’s not always obvious which people are making a mistake. But many people who claim at 62 are not evaluating how much they are giving up should they live to, say, age 85.
Given that, much of Shu’s research is aimed at trying to understand what’s driving people to claim early and what interventions can be put in place to help people think more in-depth about the Social Security claiming decision and “not just jump into it because they feel like they need the money right now.”
The good news, according to the Center for Retirement Research at Boston College, is this: The percentage of all initial claimants who are age 62 shows a steady decline over the past two decades, interrupted only briefly by the Great Recession. And unpublished Social Security data shows that just one in four claimed at 62 in 2019 and workers who delay are claiming in their mid-60s or later.
What’s more, the Social Security Administration has revised its statement to show the dollar amounts a beneficiary would receive when claiming at different ages. And this, according to some, may encourage fewer people to mistakenly claim at age 62 just because they can.
The new statement is a step in the right direction, Shu said, but there’s still more work to be done. For instance, there’s something that Shu calls “psychological ownership” that needs to be addressed. That’s the feeling that the money sitting in Social Security is yours.
“People mentally think of Social Security as like some giant 401(k) plan,” she said. “I’ve been paying into it and there’s some pot sitting there which is my money and the government is sitting on my pot of money, and I want to get it back. And so, the more that people feel that way about the money, the earlier they want to claim.”
Consider survivors benefits before claiming
Many primary wage earners don’t factor in the effect their claiming decision has on their survivors benefits. For instance, a widow or widower who is full retirement age or older would receive 100% of the deceased worker’s benefit amount. So, for those primary wage earners who claimed at 62 versus age 70, the survivors benefit would be much lower.
“I think a lot of times people are ignoring that and it’s a super important topic,” said Shu. “A lot of times, (people) make the decision in the moment without thinking about those long-run impacts. It’s those long-run impacts that are really an issue here because you’re making a decision at 62 that could still extend for another 30 years.”
Look into an annuity
People are also mistakenly dismissing using annuities to provide lifetime income. Annuities, according to Shu, are slightly better than the 4% rule for several reasons. For starters, they last forever. “A life annuity will pay for as long as you live,” she said. “You’ll have money where you might have run out under a 4% rule.”
Plus, annuity owners get the benefit of mortality credits which those that use the 4% rule don’t get. According to AnnuityFYI, mortality credits are created when people die sooner than expected and don’t receive as many income payments as they would have if they had lived their full life expectancy. That money goes into a pool that will then pay lifetime income to those people who live longer than their life expectancy.
Still, the decision to purchase an annuity does come with a cost. And that is often what stops people from buying them.
You might live longer than you think – plan for it
People often underestimate how long they might live…all the time, Shu said. Often, it depends on how you ask the question. For instance, according to research, there’s a 10-year difference in life expectancy if you ask ‘do you think you’ll live to 90?’ versus ‘do you think you’ll die by 90?’
“It’s a huge uncertainty,” said Shu. “None of us know how long we’re going live.”
Also, it’s a huge input when considering which investments, products and strategies to use when creating a retirement income plan, she said.
For those who might want to get a sense of the probability of living to certain ages, check out J.P. Morgan’s 2022 Guide to Retirement. That guide details, among other things, the probabilities of living to certain ages. Or, for a more personalized estimate, check out the Actuaries Longevity Illustrator.
Take retirement income planning seriously – it’s not simple
Nobel laureate William Sharpe once said that “decumulation,” or the use of savings in retirement is “the nastiest, hardest problem in finance.” So, if this topic is hard for a Nobel laureate, what chance do mere mortals have in getting it right?
But if us mere mortals can’t get it right, we can at least educate ourselves to improve the odds. Social Security’s website and the Consumer Financial Protection Bureau’s website are two places to begin your education.
But remember this: “Every person’s situation is unique and it’s hard to give advice that’s going to work for everyone,” said Shu. “So, how do we customize the advice? There’s no easy answer.”
Put the emotions of the moment aside
As hard as it might be for preretirees and retirees to put the emotions of the moment aside, that’s the advice Shu often has. Think more about how life looks in 20 years under different scenarios such as claiming Social Security at age 62 and living to age 95, or claiming Social Security at age 62 and not living that long.
“Think through the stories of what that feels like,” she said. “Stories for humans are very powerful because stories hold both information and emotion in them. (Stories) separate you from the emotion of the moment and get you to start thinking about what the emotion is going to feel like in the future.”