Understanding the Consequences of a Social Security Claiming Decision
According to an old proverb, the only two factors that inspire investors are greed and fear of losing money. That is, without a doubt, cynical, yet, like many ancient sayings, there is a grain of truth in it.
Is the same true when it comes to making a decision on retirement? There is evidence to show that this is the case.
Take, for example, the Thrift Savings Plan
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For example, during the market crisis of 2008-early 2009, TSP participants transferred around $22 billion out of a program with approximately $200 billion in assets at the time, from stock-based funds to the government securities G fund, which had never lost money. That money was not invested in equities at the outset of a big comeback in March 2009, which continued for the next decade and a half.
During that period, they progressively shifted money out of the G fund and into the stock funds on a net basis. Still, it wasn’t until 2015 that the total percentage of investments in the G fund restored to its pre-recession level of almost 50%.
Then, only a few months later, in February and March of 2020, there was another flight to safety as the epidemic hit. This time into the G fund, which had $24 billion placed into it out of a total amount on investment at the time of around $560 billion. Stocks reversed direction rapidly once more, but investors were a little longer to react.
Selling low and buying high is investing conduct that is considered among the worst in the world.
That is a regrettable record of judgments about retirement funds, but maybe even more problematic are the ramifications of these decisions for another critical issue: when to begin retirement.
The anecdotes of colleagues who left their jobs on short notice due to personal reasons are almost universal among long-time federal employees. It may have been the rejection of a promotion, the advent of a new know-nothing political appointment, a shift in policy direction, or any of several other possibilities. It happens because roughly one out of every six government employees is entitled to retire at any moment.
However, recent research conducted by the Center for Retirement Research revealed how this might occur. The study’s purpose was to find out how individuals reacted to information about Social Security and whether or not that information impacted their decisions about when to take advantage of that benefit.
The information included yearly reports predicting when the Social Security trust fund will be exhausted, which is now predicted to occur in around 13 years. In those years after that, unless the legislation is modified before then, there will only be enough money flowing in from Social Security taxes to pay roughly 75% of the benefits that have been promised to the beneficiaries who will be in the majority at the time.
According to the researchers, it gauged responses to stories that contained that information but were otherwise identical save for the headline and the first line of the piece. Social Security Faces a Long-Term Financing Shortfall was the study’s title for the control group.
According to three other reports, the Social Security Trust Fund will deplete its reserves by 2034; the Social Security Fund is on the verge of insolvency by 2034, according to trustees; and revenues are projected to cover only 75% of scheduled Social Security benefits after 2034, according to trustees.
When compared to the control group, those in the three other groups expressed an intention to begin drawing Social Security benefits about a year earlier, which would result in a reduction in their benefit amounts. However, less than one-tenth of those in the other groups expressed an intention to begin saving more money for retirement. “If future recipients follow through on their desire to claim a year sooner, they will lock in lower monthly payments without having to increase their savings to make up for the difference,” the report stated. ”
The study also discovered that, after reading the story, which made it clear that the program could provide 75 percent of promised benefits in the long run even if no changes were made, nearly a fifth of those who responded said they expected to receive nothing or no more than 20 percent of their promised benefits in the long run. Another quarter of respondents stated that they anticipated getting between 20 and 60% of the total.
That first reaction appears to be motivated by greed, whereas the second seems to be inspired by fear. Make sure to keep an eye out for them when it comes time for you to make critical retirement decisions.
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Bio:
I advocate for federal employees making the best benefit and retirement decisions for their unique situations.
After a 25 year career in personal banking I saw a need for financial education and retirement planning for those approaching retirement.
In recent years I have focused primarily on federal employee from both the CSRS & FERS systems. These federal employee face challenges in getting the information they need to make the best decisions for creating a successful retirement plan. I assist these individuals in navigating the retirement process.
