‘Bridges’ to Maximize Social Security Benefits Should Be Built Into 401(k)s, Researchers Say

By Nick Fortuna

Updated January 18, 2021 / Original January 17, 2021

Although you can no longer receive Social Security checks in the mail, retirement researchers say you should wait to claim until age 70 to maximize benefits.

Retiring workers ages 60 to 69 should automatically receive monthly payments from their 401(k) or similar retirement savings plans unless they opt out, an idea researchers say would help bridge the gap until Social Security benefits reach their maximum at age 70.

Retirement researchers recently have been touting the benefits of a so-called bridge strategy, whereby retirees front-load withdrawals from 401(k) plans and individual retirement accounts to delay claiming Social Security. For each year that a person delays claiming up to age 70, his monthly Social Security check goes up 7% to 8%. As a result, monthly benefits claimed at 70 are at least 76% higher than those claimed at 62.

This new idea, put forth in a new paper from the Center for Retirement Research at Boston College, calls on 401(k) plan sponsors to introduce a default “bridge fund” into 401(k) plans that would use fund assets to deliver automatic monthly payments to anyone who retires in their 60s at a level equivalent to the monthly Social Security benefits that seniors would receive at full retirement age.

Retirees would be allowed to opt out of this strategy easily, says Gal Wettstein, senior research economist at the Center for Retirement Research and co-author of the paper, but including automatic withdrawals as the default option in plans would encourage many retirees to hold off on claiming Social Security.

Since 401(k) plan sponsors don’t need legislation or regulatory changes to implement this feature as a default setting in plans, Wettstein says, automatic withdrawals may be the easiest way to help seniors guarantee themselves more income late in life. “This seems like something that could be set up right away by a plan sponsor,” Wettstein says. “People just tend to stay with the default. It seems to be a characteristic of human nature, so if we want people to use this strategy for delaying claiming, things have to be as seamless as possible.”

Using data from the University of Michigan Health and Retirement Study, the researchers at Boston College looked at three strategies for annuitizing income: immediate annuities, where a person pays a one-time premium in exchange for annuity payments that begin immediately; deferred annuities, where a person may pay a lesser premium at, say, age 65 and defer payments until age 85; and delaying Social Security.

Researchers focused primarily on households in the 50th percentile of wealth distribution and found that for them, delaying Social Security provided the highest “utility equivalent wealth,” meaning it required the least amount of wealth to achieve the same benefit.

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Wettstein says the administrative and marketing costs associated with commercial annuities, and the expectation that they turn a profit for the insurer, make them expensive investment vehicles for the average person. Commercial annuities also face an “adverse selection problem” that forces insurers to raise premiums: Annuities are most appealing to retirees who are in good health, while those facing serious health issues are likely to keep their assets in cash.

“For typical people, Social Security is the best kind of annuity they can buy,” Wettstein says. “Social Security doesn’t have a lot of those disadvantages, so it has sort of a leg up in providing a low-cost product. But it’s limited—you can only delay claiming until 70—so it’s not like this is going to replace all private annuities.”

Though annuities are now available as investment options in some 401(k) plans, they don’t provide as much income protection as the bridge strategy, Wettstein says, adding that delaying Social Security is the “low-hanging fruit” for seniors seeking annuitized income.

“I am cautiously optimistic about the inclusion of annuities as options within 401(k)s, whether as defaults or not, but I still think that for most people, delaying Social Security is certainly what they should try to do first,” he says. “The annuity that you get from Social Security is simply cheaper in many ways than commercial annuities.”