Q: What are some common misconceptions folks have about Social Security, and what can prospective retirees do to maximize benefits — delaying retirement until 67 for instance.
A: We talk about this regularly. The misconceptions about Social Security lead to what we term “behavioral biases” that cause Americans to make poor choices.
- The first is that Social Security will disappear. The media has stirred a lot of misconceptions about the viability of the Social Security Trust and the perception that it’s a “Ponzi scheme.” History and leading experts show coverage of SS benefits and easy resolutions to fix the system. The misconception is that retirees should claim early before changes are made. But as I stated earlier, the likelihood that imposed changes will impact those near retirement is slim. Most people, especially those who are retiring near-term, should not be worried.
- Another is that I’ll get more if I claim early. Over 70% of Americans claim early when they can garner significantly more by crafting a strategy that leverages the rules. Many of the optimal claiming strategies involve a delay of starting benefits. An optimal strategy for a married couple typically pays about $100,000 more in cumulative benefits than starting early. But so many Americans believe that taking less for more years means a larger cumulative benefit — and that is not the case.
- A third is that I can invest benefits by starting early to get more. Most strategies that maximize benefits involve some component of “delaying.” For every year past your full retirement age you receive 8% more per year. I don’t know many Americans who will be able to find 8% guaranteed over this four-year period. Remember these added benefits go on over the person’s lifetime. Social Security becomes a hedge on the risk that you live longer than you expect to live. Your benefits continue for as long as you are alive.
Q: Is Social Security alone enough? If no, what other forms of retirement income/investing do you recommend most often to clients?
A: The average Social Security monthly payment for Americans in 2012 is about $1,230. That’s not much to live on. The maximum benefit one can receive at full retirement age — and this is for someone who has earned at or above the maximum taxed earnings every year of their career — is only about $2,500. So, no, Social Security is not enough for most consumers. As a result, a key element is figuring out how you maximize your benefits and then integrate a Social Security strategy into your overall retirement income plan.
Q: What are some retirement investments that you think are too risky or downright bad for investors — annuities, for instance, or super-low yield CDs or high-risk small caps?
A: We would warn impending retirees to be careful of three potholes: investments with high cost, income and investment scams, and going long on the yield curve.
First, there are a lot of very high-cost investments that kill you over time. For example, many annuities have egregious mortality and internal expenses. Simple low-cost ETFs built into a diversified portfolio can take you far. Even laddering CDs can beat many “loaded” annuities. If you do consider an annuity, make sure you find a low-cost product from a highly rated insurance company.
Second, if someone is offering a crazy high yield or something that is significantly better than anything else you have seen, it is most likely a scam. We are shocked by the number of seniors that are taken advantage of and bamboozled.
Finally, be careful about investing in long-term bonds. Interest rates are at an all-time low and have nowhere to go but up over time. We think it’s prudent to have shorter-term fixed income married with a managed tax-efficient withdrawal strategy over time.
Q: Anything else you think Americans should know about planning for retirement? Any resources you recommend?
A: We have a service that helps Americans maximize their Social Security based on four years of research published in leading academic journals at www.socialsecuritysolutions.com. Deciding on a claiming strategy is a huge decision that it is too complex. You need help and software to run your numbers and evaluate claiming strategies that are best for you.
The key is that consumers need to understand that maximizing their Social Security will significantly increase the longevity of their portfolio. Per our article in the April 2012 issue of the Journal of Financial Planning, maximizing Social Security can add two to 10 years to the spend-down of the portfolio. The takeaway is that maximizing Social Security and then coordinating a claiming strategy with how you draw down on your money over time can have a huge impact on making your money last longer.
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at email@example.com or follow him on Twitter via@JeffReevesIP.