According to the Social Security Administration’s website, Social Security will replace about 40% of an employee’s pre-retirement income after retirement.
It explains that this will be lower for people in the upper income brackets and higher for people with low incomes. “You’ll need to supplement your benefits with a pension, savings or investments,” the website says.
However, even the Social Security Administration notes that most financial advisers say a person will need about 70% of pre-retirement earnings to comfortably maintain his pre-retirement standard of living. So, 40% is more than half of what the average person will need.
“Social Security is the largest retirement income asset for 99% of Americans,” says William Meyer, founder and managing principal of Social Security Solutions, who is based in Kansas City, Kansas.
Pre-retirees, those within 10 years of retiring, expect they will receive $1,805 a month in Social Security benefits, but retirees actually collect an average of $1,408, a 28% difference, according to the sixth annual survey by the Nationwide Retirement Institute. Twenty-six percent believe they can live comfortably on Social Security alone, and 44% say that it will be their main source of retirement income.
Seventy percent think they are eligible for full benefits before they actually are. On average, they incorrectly think they will be eligible for full benefits at age 63, and 26% think that even if they claim early and receive lower benefits, these benefits will rise once they reach full retirement age.
Clearly, Americans need Social Security education.
Plan sponsors and providers have stepped up to provide education. Many offer education seminars and calculators, and some have even brought in representatives from the Social Security Administration to help educate employees.
“We know of a lot of HR professionals that have taken it upon themselves to learn about Social Security and teach employees about the basics. Or, during benefits fairs, they bring in a Social Security expert,” says Brogan O’Connor, senior financial planner, Sentinel Benefits & Financial Group in New York City. “Employers also guide employees to the correct resources.”
Meyer notes that the Social Security Administration has a mandate that its employees can’t give advice, so staff brought in by retirement plan sponsors and providers can only provide general education.
O’Connor says his firm offers Social Security education sources to retirement plan sponsors. “We have a library of presentations we can tailor to each audience and sophistication level, depending on the industry of the plan sponsor,” he says.
In a general setting, Sentinel provides Social Security basics, such as when employees can take their benefits, rules about spousal benefits and the benefits of delaying taking Social Security. But, O’Connor says its financial planners also do one-on-one consultations. “We can explain more what each person’s Social Security benefit is, how much income they want in retirement and how much Social Security factors into that,” he says.
Going beyond education to actual planning
According to Meyer, that kind of personalization is what is needed. “The classic wellness programs and education done by plan sponsors, recordkeepers and advisers are good and have made progress. But, from my point of view, they are missing the mark, missing personalization,” he says.
He notes that when a group of people attend Social Security education, many still come out of it saying, “What does this mean for me?” Participants need to be given next steps, Meyer says.
“Much education focuses on how to maximize Social Security benefits, but employees need to know how to coordinate this with other savings,” Meyer adds. “People can claim Social Security as early as 62. If they decide to wait until at least age 70 to maximize their benefits, they will need other savings to do that.”
He notes that his firm found in a study that if an employee draws from his defined contribution (DC) plan savings in order to wait and maximize his Social Security benefit, he can make his income last two years longer in retirement, as well as reduce taxes and required minimum distributions (RMDs).
Social Security Solutions has a new wellness program that helps employees understand how to maximize Social Security benefits and coordinate this strategy with other savings.
The first step, according to Meyer, is to look at Social Security by itself and understand a maximizing strategy versus taking benefits early. He says most people take Social Security as early as possible. He attributes this in part to the fact that Social Security gives employees a report showing what their benefits will be on a monthly basis. “Employees are more likely to claim early if they only focus on the monthly benefit,” Meyer contends. “If they look at cumulative benefits, it could change behavior. A difference of a couple hundred dollars a month is no big deal, but adding that up over 20 or 30 years in retirement can be hundreds of thousands of dollars.”
The second step is coordination with other savings. “What we do in our financial wellness program is show two bars side by side—one of which shows the result of tapping into DC plans while waiting to maximize Social Security,” Meyer says.
He explains that if a single person starts Social Security as soon as he can, he will get approximately 72% less per month, and will have to take more out of his DC plan during and in later retirement years. If he delays taking Social Security until age 70, he will have to draw down from his DC plan without any Social Security until age 70. This will result in taking more out of his DC plan in the earlier years of retirement, but at age 70, he will get 32% more Social Security income on average and be able take less out of his DC plan in later retirement years.
Meyer adds that if a retirement plan participant claims Social Security at the maximum, the draw-down of DC plan assets until then reduces his balance, which will reduce RMDs at age 70 1/2, and the participant will save on taxes.
According to Meyer, historically, tools have not performed well with plan sponsors—employees have been given tools but haven’t used them. Social Security Solutions’ wellness tool provides a push report, an analysis individualized to every employee. “We get information from recordkeepers and plan sponsors and deliver via email or a plan sponsor Intranet on a page that has five different diagnostics—one for maximizing Social Security, one for coordinating Social Security and retirement plan accounts, estimates for how much money employees can spend, how much longer they can make their income last, and whether they are ready to retire,” he explains.
“We found that by presenting information in the right way, it changes behavior and makes participants feel more retirement ready and confident,” he says.
On a note to employees who do not think Social Security will be there for them when they retire, Meyer offers some historical perspective. “At other times, the Social Security system has been in a similar situation as it is today, and in short order, lawmakers were able to fix the system and get it funded. There are approximately 30 different proposals currently to shore up the system, and it will be hard politically with all the Baby Boomers retiring to cut things. We have a precedent and history in shoring up the system, and I believe we will do the same again. Those approaching retirement will get benefits based on current rules, while those younger need to keep an eye out for reform,” he says.
Presenting a total picture to employees
According to O’Connor, retirement plan sponsors need to realize that having general education about their DC plan and just general investment education is helpful, but there are so many factors people going into retirement don’t understand and should. He says having more pinpoint-type education helps employees feel more comfortable with their entire retirement picture. Education should not only include Social Security, but also Medicare, insurance coverage that will be needed, and getting estates in order.“From our perspective, we want to make sure people are looking at all aspects of financial planning. We run into a lot of situations in which people tend to look at things in a silo, such as just looking at what their DC plan will provide. So, we try to promote education about all aspects to help them feel confident,” O’Connor says.
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