People Regret Taking Social Security Too Early

Why is Social Security hard for people to understand? Maybe it’s the 2,700 rules in the Social Security handbook, says David Giertz, president of Nationwide Financial Services sales and distribution. A former financial adviser, Giertz says advisers can be reluctant to bring up a topic unless they’re completely up to speed.

But misconceptions about Social Security benefits abound, Giertz tells PLANSPONSOR, and retirement plan sponsors have an opportunity to help strengthen their employees’ retirement success by providing information about this critical benefit. A survey conducted by the Nationwide Financial Retirement Institute found that more than a third of respondents (38%) felt they had turned on their Social Security too soon and wish they had delayed the onset of benefits.

“Social Security can represent up to 40% of the total income the average worker receives throughout retirement,” Giertz says, making how and when to file among the most important financial decisions they will make. Although many people mistakenly think that Social Security begins automatically or that they should begin receiving it at a specific retirement age, they could lose up to $300,000 in benefits over a 25-year period of retirement, by accessing them sooner than necessary.

A surprising finding, Giertz says, is that people surveyed who do not work with a financial adviser were twice as likely to say their Social Security benefits and income were less, or even much less, than they expected, illustrating people’s need for guidance. “It’s clear that working with a financial adviser allows people to have a better and more successful retirement,” he says.

“When we talked to these consumers, we found most expect their financial adviser to have a conversation about Social Security,” Giertz says, which makes sense when considering retirement planning as a holistic process. He says it was shocking to find that just 12% of financial advisers are having the conversation about when to take Social Security benefits with their clients. Part of it may be the daunting number of rules in the Social Security handbook.

Health care costs will eat up an ever-growing portion of assets, Nationwide says. Health care costs for a middle-income healthy couple retiring next year at full retirement age will take up 69% of the couple’s Social Security benefits, according to Nationwide.

In 10 years, those figures will soar to 98%, and in 20 years, the same couple would need 127% of their Social Security benefits to cover their health care costs in retirement. Health problems, which can come on unexpectedly, keep 32% of retirees from living the retirement they would like. 

Nationwide found clear differences in understanding of Social Security between respondents who worked with a financial adviser and those who did not. Those working with an adviser tended to begin collecting benefits at a later average age (63) than those not working with an adviser (61). A substantial majority of those working with an adviser (92%) knew that delaying benefits increases the amount of benefits each year, up to age 70, compared with 77% of people without an adviser who could identify the statement as true.

Those working with an adviser were also more likely to know that Social Security benefits can be offered to a spouse or children (90% vs. 81%) and to know how much pre-retirement income is need to have a comfortable retirement (74% vs. 62%).

Other findings in the study are:

• Nearly three in four people surveyed said Social Security is their top source of expected retirement income for out-of-pocket health care costs;
• Health care expenses keep more than one-quarter of current retirees from living the way they had planned to in retirement;
• A quarter of current retirees say their Social Security payment was less than they had expected; and
• Respondents who are nearing retirement expect a higher monthly Social Security payment ($1,526) than either recent retirees ($1,361) or those within the first 10 years of retirement ($1,191).

The 2014 Social Security Study was fielded online in the U.S. between February 27 and March 4 by Harris Interactive on behalf of Nationwide Financial. Respondents were 903 U.S. adults age 50 or older, either retired or within 10 years of retirement. The survey and its results can be accessed on Nationwide’s website.