Efficient Retirement Design:
Combining Private Assets and Social Security to
Maximize Retirement Resources
John B. Shoven
Sita N. Slavov
Research Supported by Social Security and the Sloan Foundation
What is the Prevalent Retirement Design?
Answer = Start Social Security Almost Immediately
Commencement of Social Security
2
What Could People Do?
• Separate retirement and Social Security
commencement decisions
• Social Security benefits are increased (actuarially
adjusted) for later commencement
• DC assets could be used to finance deferral rather
than to supplement Social Security benefits
3
The Actuarial Adjustments for Delaying Social Security
Commencement
% Change in Monthly Benefit
Defer to
70
76.00
65.00
52.31
41.43
32.00
22.22
13.79
69
65.33
55.00
43.08
32.86
24.00
14.81
6.90
68
54.67
45.00
33.85
24.29
16.00
7.41
67
44.00
35.00
24.62
15.71
8.00
66
33.33
25.00
15.38
7.14
65
24.44
16.67
7.69
64
15.56
8.33
63
6.67
62
63
64
Defer From
65
66
67
68
6.45
69
4
One Reason that Deferring Social Security is
Attractive: Market Interest Rates are Low
Ten-Year TIPS Interest Rates, January 2003 to March 2014
3.5
3
2.5
2
Percent
1.5
1
0.5
0
Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14
-0.5
-1
-1.5
Month
5
Another Reason: People are Living Much Longer
Life Expectancy of People in Their 60s Today
Table 1. Remaining Life Expectancies of Retirement Age Singles
Age
Men
Women
62
21.3 (33)
23.5 (35)
63
20.6 (32)
22.7 (34)
64
19.9 (31)
21.9 (33)
65
19.1 (30)
21.1 (32)
66
18.4 (29)
20.3 (31)
67
17.6 (28)
19.5 (30)
68
16.9 (27)
18.7 (29)
69
16.2 (26)
17.9 (28)
70
15.5 (25)
17.1 (27)
Note: Numbers in Parenthesis represent 90th percentile outcomes
Data: Social Security Cohort Life Tables for people born on 1/1/1951
6
Life Expectancies for Couples
Table 2. Life Expectancies of Retirement Age Married Couples
Age of
Husband
62
63
64
65
66
67
68
69
70
Age of Expected Years
Wife
to First Death
60
61
62
63
64
65
66
67
68
17.53 (28)
16.85 (27)
16.18 (26)
15.51 (25)
14.85 (24)
14.19 (23)
13.53 (22)
12.89 (21)
12.26 (20.5)
Expected Years
to Second Death
Expected Length
of Widowhood
29.11 (37)
28.21 (36)
27.31 (35)
26.41 (34)
25.52 (33)
24.64 (32)
23.75 (31)
22.87 (30.5)
22.00 (29.7)
11.58
11.36
11.13
10.90
10.67
10.45
10.22
9.98
9.74
Note: Numbers in parenthesis represent 90th percentile outcomes
Data: Cohort life tables from Social Security used in the 2012 Trustees Report for men
7
born on 1/1/1951 and women born on 1/1/1953
Deferring is a Much Better Deal for the
Higher Earner in a Couple
• Survivor (widow) benefits are based on the
higher of the two individual benefit amounts
• Higher earner’s benefits are paid out as a
second-to-die annuity (for 22 to 25 years)
• Lower earner’s benefits are paid out as a firstto-die annuity (12 to 15 years)
8
The Advantage of Knowing the Rules in Detail:
Getting Paid By Social Security While Deferring
• If higher earner defers to 70, he or she can collect spousal
benefits at 66 and still defer own-record benefits
• Collecting spousal benefits after the Full Retirement Age
(66) is almost always part of an efficient retirement design
for couples
• Many singles can collect spousal benefits on an ex-spouse
and still benefit from deferring own-record benefits
9
The Suggested Strategy
• Single men in average health should defer to 68 to 70.
• Single women in average health should defer to 70
• Higher earner in a couple should defer to 70 unless
both spouses are in poor health. Higher earner should
consider collecting spousal benefits at 66
• When the lower earner starts benefits doesn’t make
much difference
10
What is the Potential Gain?
Optimal Claiming vs. Immediate Claiming at 62 with 0% Real Interest Rate
AIME=3,476 AIME = Max
Single Man, Average Health
40,000
60,000
Single Man, Good Health
60,000
100,000
Single Woman, Average Health
60,000
95,000
Single Woman, Good Health
85,000
135,000
Two-Earner Couple, Lower PIA is
75%, Average Health
125,000
200,000
Two-Earner Couple, Lower PIA is
75%, Both in Good Health
170,000
270,000
11
Case Study of Two-Earner Couple
• Husband and wife are both 62, in average health, and are retiring
• Husband’s average annual income was approximately $55,000
• Wife’s average income was approximately $42,000
• Combined 401(k) Assets are $250,000
• Common Strategy: Start Social Security at 62 and buy annuity with
401(k) funds
• Optimal Strategy: Husband Defers to 70, wife to 66
12
Couple’s Income with Immediate
Commencement and Annuity Purchase
Two Percent Inflation Assumption
13
Couple’s Income with Efficient Retirement Design
Efficient Retirement Design Has Wife Starting Benefits at 66, Husband Collecting Spousal Benefits at 66 and Own Benefits at 70
14
Difference in Income at 70 and Beyond
Income is Identical
from 62-69
15
Advantage : 25-30% Higher Widow’s Benefits
Survivor's Income with Each Strategy
5,000
Extra Widow's Income with 66/70 Series Strategy
Widown's Income with Parallel Strategy
4,500
4,000
Monthly Income
3,500
3,000
2,500
2,000
1,500
1,000
500
0
70
71
72
73
74
75
76
77
78
79
80
Age
81
82
83
84
85
86
87
88
89
90
16
Add It Up
• Couple Has Same Income from 62-69
• $579 - $1,450 more per month from 70 onwards
• Survivor (Widow) Enjoys 25-30% more income
• Children may benefit since likelihood of a dependent
widow is reduced
• Deferring to 66 and 70 dominates the outcome
where both spouses start Social Security at 62
17
Social Security Benefit Rules are
Very Complicated, but…
Who Should Defer Social Security?
The answer at current interest rates,
almost everybody!
18
Who Should Defer Social Security?
At current real interest rates, almost everybody!
Optimal commencement age shown in parenthesis
–
–
–
–
–
–
–
Single black male with less than high school education (68)
Single male in poor health (2X mortality) (65)
Single woman in average health (70)
Single woman in poor health (2X mortality) (68)
For couples, almost all primary earners should defer to 70
Most non-earners in one-earner households (66)
Secondary earners in two-earner households (varies from
62 to 70 depending on race, education and health)
19
The hidden opportunities with
Social Security
Christopher Jones
Chief Investment Officer, Financial Engines
Confidential. Prepared solely for CIEBA webinar. Not for participant use. Features, prototypes, and future service enhancements shown for evaluative
purposes only. Timelines subject to change. Financial Engines® and Retirement Help for Life® are trademarks or service marks of Financial Engines, Inc.
Advisory services provided by Financial Engines Advisors L.L.C., a federally registered investment advisor and wholly owned subsidiary of Financial
Engines, Inc. Financial Engines does not guarantee future results. Presentation cannot be copied or reproduced in any manner without the express
written permission of Financial Engines. All intellectual property rights reserved. Financial Engines does not provide legal or tax advice.
Key Themes
Public views on Social Security
early results from a national survey conducted by Greenwald Associates
A framework for maximizing retirement
gains from thinking holistically
Impact of the Social Security decision
an illustration
Long-term Care
Social Security
ETFs
Inheritance
HSAs
Annuities
Taxes
Retirement
Roth IRA
401(k)
Pensions
Medicare
Bonds
Cash Balance
Diverse income sources
Other
7.7%
Personal
savings
13.6%
Social Security
37.1%
DB
14.9%
DC
26.7%
See Notes and data sources page at the end of this presentation for more information.
A closer look at Social Security
60% rely on Social Security for >75% of income
46% unmarried rely on Social Security for >90% of income
Over
8,000 different claiming options for married couple
Despite importance, big knowledge gaps exist
See Notes and data sources page at the end of this presentation for more information.
Early results from national survey
Greenwald Associates fielded and analyzed a
national survey on behalf of Financial Engines
OBJECTIVE:
Understand near-retiree and retiree views
and behaviors on Social Security claiming
Survey fielded in October, 2013
1,008 survey respondents, ages 55–70
See Notes and data sources page at the end of this presentation for details regarding the Financial Engines study conducted by Greenwald Associates.
The good news: High confidence
Q: How confident are
you that you know enough about claiming
Social Security to make a good decision for your household?
MEN
79%
A: Very
confident
or somewhat
confident
WOMEN
73%
The bad news: poor understanding
Neither men nor women scored well on a simple Social Security quiz
Scored a “D” or an “F”—
missing more than
4 of 8 questions
MEN
Answered all
questions correctly
MEN
5%
WOMEN
5%
41%
WOMEN
50%
Education makes a difference
52% say they would consider delaying when
increase in benefits explained
Estimate for claiming age
increased by 1 year,
even using very generic text and video
illustrations
Working longer top way to bridge gap
Q: Suppose
you did delay claiming Social Security benefits.
How would you bridge the gap?
A: You would work longer
MEN
48%
WOMEN
43%
People less comfortable using DC assets
Q: Suppose
you did delay claiming Social Security benefits.
How would you bridge the gap?
A: You would use
401(K) or other
retirement savings
MEN
26%
WOMEN
14%
Social Security Claiming help wanted
71% said they would be likely or extremely likely
to use help provided through employer
For 59%, DC provider and expert selected by
employer were most trusted sources for help
Summary of early research highlights
Confidence in claiming high; literacy low
Longevity & spousal benefit key factors
Education can impact deferral strategy
People uncomfortable using savings to bridge gap
People seeking help with claiming decision
A framework for
maximizing retirement
Maximizing retirement
Savings
Income
+
Maximizing retirement
1+1=3
Framework objectives
1. Maximize the value of income sources
Social Security, pensions, part-time work
2. Use 401(k), DB lump sum, IRA to:
• Maintain reserves (liquidity)
• Fill in income gaps
• Create flexible spending
3. Avoid tax surprises
Maximizing value from savings
401(k) + IRA
•
•
•
•
Maintain reserve
Create flexible spending
Fill in gaps in income timing
Adapt to new circumstances
Lump sum pension
• Natural complement to Social Security
Managing savings for income
• Protect from market, rate changes
• Provide growth opportunity
• Longevity protection
Bringing it all together
Making decisions holistically can unlock hidden value
• Get the most from your retirement resources
• Help to address substantial retirement income shortfalls
An approach that balances safety + flexibility
• Protect as well as maximize
• Adapt to changes & meet retiree preferences
Social Security is key component of any strategy
• Provides great opportunity for increasing lifetime wealth
• Leverage other retirement income & savings to stretch Social Security dollars
Illustration
Decisions regarding Social Security are highly personal and depend on a number of factors such as your health and family longevity, whether you plan to work in retirement, whether you
have other income sources as well as your anticipated future financial needs and obligations. Fictional characters and examples shown are for illustrative purposes only. Individual results
may vary.
Meet Dan and Jane
Jane: 62
Dan: 66
Status: Ready to retire
Both have Social Security, which
they plan to start immediately
How can they create
expects a $5,000 pension at age 65
the bestJane
retirement?
They have $150,000 in 401(k) and IRA assets
Fictional characters shown for illustrative purposes only.
Initial strategy
Lifetime Benefit Value
$621,000
Household Income = $27,000
100,000
90,000
80,000
70,000
60,000
Jane claims Social Security at 62
Dan claims Social Security at 66
50,000
40,000
30,000
20,000
10,000
0
62
66
63
67
64
68
65
69
66
70
67
71
68
72
69
73
70
74
71
75
72
76
73
77
74
78
75
79
76
80
77
81
Initial strategy
Household Income = $27,000
$32,000
Survivor Income = $20,500
100,000
90,000
80,000
Jane claims pension at 65
70,000
60,000
50,000
40,000
30,000
20,000
10,000
0
62
66
63
67
64
68
65
69
66
70
67
71
68
72
69
73
70
74
71
75
72
76
73
77
74
78
75
79
76
80
77
81
Initial strategy
Household Income = $32,000
Survivor Income = $20,500
We can’t touch
our savings
100,000
90,000
80,000
70,000
60,000
50,000
40,000
30,000
20,000
10,000
0
62
66
63
67
64
68
65
69
66
70
67
71
68
72
69
73
70
74
71
75
72
76
73
77
74
78
75
79
76
80
77
81
Why don’t people want to spend their 401(k)?
Safety = flexibility
• Strong desire to maintain access to money if needed
Behavioral biases
• Spent lifetime accumulating nest egg, reticent to draw it down
• Don’t know how to translate balance into income
• Worried about it running out
But, most retirees will need to spend their savings
• Personal savings represent about 40% of retirement wealth
• Social security alone is not sufficient to maintain lifestyle
Creating an explicit reserve can help
• Liquid source of money for unanticipated events
Add flexible lifetime income from savings
Household Income = $32,000
Survivor Income = $20,500
100,000
90,000
80,000
Use $50,000 of 401(k) + IRA
70,000
Fill in pension income gap ($15,000)
60,000
50,000
40,000
30,000
20,000
10,000
0
62
66
63
67
64
68
65
69
66
70
67
71
68
72
69
73
70
74
71
75
72
76
73
77
74
78
75
79
76
80
77
81
Add flexible lifetime income from savings
=
$27,000
Survivor Income = $20,500
$27,000 +5.5%
$21,620
Household Income = $33,120
$32,000 +3.5%
100,000
90,000
80,000
70,000
Add lifetime income ($35,000)
60,000
50,000
40,000
30,000
20,000
10,000
0
62
66
63
67
64
68
65
69
66
70
67
71
68
72
69
73
70
74
71
75
72
76
73
77
74
78
75
79
76
80
77
81
Is there a better solution?
100,000
90,000
80,000
70,000
Jane takes earned benefit at 62
Dan claims spousal benefit at age 66
60,000
Dan claims earned benefit at age 68
50,000
40,000
30,000
20,000
10,000
0
62
66
63
67
64
68
65
69
66
70
67
71
68
72
69
73
70
74
71
75
72
76
73
77
74
78
75
79
76
80
77
81
Is there a better solution?
Lifetime Benefit Value
+ $93,000
Household Income
Survivor Income
= $34,880
$32,000 +9.0%
= $20,500
$23,380 +14.0%
100,000
90,000
80,000
70,000
60,000
Using only $45,000 of 401(k) + IRA
Social Security
& pension bridge
50,000
40,000
30,000
20,000
10,000
0
62
66
63
67
64
68
65
69
66
70
67
71
68
72
69
73
70
74
71
75
72
76
73
77
74
78
75
79
76
80
77
81
Maximizing Social Security
100,000
90,000
80,000
70,000
Jane takes earned benefit at 62
Dan claims spousal benefit at age 66
60,000
Dan claims earned benefit at age 70
50,000
40,000
30,000
20,000
10,000
0
62
66
63
67
64
68
65
69
66
70
67
71
68
72
69
73
70
74
71
75
72
76
73
77
74
78
75
79
76
80
77
81
Maximizing Social Security
100,000
90,000
80,000
70,000
60,000
50,000
Use $50,000 from
401(k) and IRA
40,000
30,000
20,000
10,000
0
62
66
63
67
64
68
65
69
66
70
67
71
68
72
69
73
70
74
71
75
72
76
73
77
74
78
75
79
76
80
77
81
Maximizing Social Security
Lifetime Benefit Value
+ $134,480
Household Income = $37,760 +18.0%
Survivor Income
= $26,260 +28.1%
100,000
90,000
80,000
Need additional $36,000 from reserves
or part-time work
70,000
60,000
50,000
40,000
30,000
20,000
10,000
0
62
66
63
67
64
68
65
69
66
70
67
71
68
72
69
73
70
74
71
75
72
76
73
77
74
78
75
79
76
80
77
81
What we’re doing to help
Holistic income planning experience
Social Security guidance to generate more retirement income
Year-by-year Income Plan brings together all income sources
Access to advisors to discuss Social Security and Income Plan
Implement plan and get steady payouts for life*
* Requires purchase of an out-of-plan annuity; issuer minimum purchase requirements may apply. Financial Engines does not guarantee payout amounts or payouts for life. IRA
management services separately provided. Account minimums may apply. Availability subject to provider commitments and deployment schedule.
Social Security guidance
Do-it-yourself web experience
• Interactive illustration of personal strategy
Advisor helps for key decisions
• When to start for participant & spouse
• Benefits of delaying claim
• Clear, actionable steps to implement
Available to all participants
• Does not require use of managed accounts
For illustrative purposes only.
Decisions regarding Social Security are highly personal and depend on a number of factors; including current cash needs, health and family longevity, plans to work in retirement, other
retirement income sources, anticipated future financial needs, and actual Social Security benefit.
Personalized Income Plan
Year-by-year breakdown of
all household income sources
• Social Security for both spouses
• Pension
• Part-time work
• All retirement accounts: 401(k), IRA
For illustrative purposes only.
Not all features currently available. Some features are under consideration and/or in development. Presented for discussion purposes, non-binding and subject to change without notice.
Income+: Flexible lifetime spending
Preparing for and generating payouts
• Protect spending level of portfolio
• LDI approach for steady lifetime payouts*
• Flexible payouts for income bridge
Implement Income Plan
• Use savings to bridge deferral gap
• See impact of bridge, maintain reserves
Advisor helps through retirement
• Assist with withdrawals
• Review payouts & “pay raises”
• Discuss life changes, outside annuities
For illustrative purposes only.
* Requires purchase of an out-of-plan annuity; issuer minimum purchase requirements may apply. Financial Engines does not guarantee payout amounts or payouts for life. IRA
management services separately provided. Account minimums may apply. Availability subject to provider commitments and deployment schedule.
Notes and data sources
Slide 4
•
Cerulli Associates, Evolution of the Retirement Investor 2012.
Slide 5
•
60% of retirees over 65 rely on Social Security for 75% of income: EBRI Databook on Employee Benefits, 2010.
•
46% of unmarried persons rely on Social Security for 90% or more of their income: Social Security Administration, Social Security
Basic Facts, February 7, 2013.
•
Up to 8,000 different claiming options for a married couple: "Claiming Social Security: NPV, Liquidity and Survivor Benefits." Dr.
Jason Scott. 2012 Retirement Income Summit; October 10, 2012.
Slide 6-13
•
Greenwald & Associates conducted the research on behalf of Financial Engines. Information for this study was gathered through a
15-minute online survey with 1,008 near-retirees and retirees between the ages of 55 and 70 who have an annual household income
of at least $50,000. The survey included 374 people who have already claimed their Social Security retirement benefits (median age
of 65) and 634 people who have not (media age of 59). The study was fielded between October 15 and October 20, 2013. The survey
data were weighted by age, gender and education to reflect the composition of the U.S. population ages 55-70. Relevant subgroup
findings are presented where there are significant differences at the 95% confidence interval.