A new study suggests Americans may be open to using 401(k) assets as a "bridge" income stream so they can delay taking Social Security benefits.
Using 401(k) assets in such a way, as part of a default feature of employee benefits plans, could be a strategy for increasing lifetime income in retirement since it would result in higher Social Security benefits, the Center for Retirement Research at Boston College said in a newly released report.
Researchers found that up to about a third of workers would use such an option.
"The bridge option would use 401(k) assets to pay retirees an amount equivalent to their Social Security benefits so they can postpone claiming benefits, thereby increasing their monthly payment when they do eventually claim," the report said.
The authors of the study, Alicia H. Munnell (the center’s director) and Gal Wettstein (a senior research economist), noted that the 401(k) bridge option could serve as an important strategy for tackling the problem of lifetime income in retirement. They said that while annuities represent a more conventional strategy for guaranteed lifetime income, the public continues to have an aversion to the product for a number of reasons.
"Explanations for the low demand include the high cost of private annuities due to adverse selection, a reluctance to hand over a pile of accumulated assets for a stream of future income, and a failure to understand the value of insurance against outliving one’s resources," they wrote. "To address these impediments, employers could increase the availability of lifetime income by adopting a Social Security ‘bridge’ strategy within their 401(k) plans."
As envisioned by the researchers, the bridge option would allow pre-retirees to use 401(k) assets as an income bridge that would let them delay taking Social Security benefits as long as possible. Because the benefits increase every year they are delayed, participants would essentially be buying a higher lifetime Social Security income, the researchers said.
The authors estimate that workers can increase their monthly Social Security benefits by 76% by claiming them at the maximum recipient age of 70 rather than the minimum age of 62.
Munnell and Wettstein also stressed that the strategy would overcome one of the biggest hurdles to getting U.S. workers to focus on guaranteed income: their distrust of insurance companies and annuities.
"Purchasing additional Social Security income does not involve handing over accumulated assets to an insurance company, provides a familiar form of lifetime income that is adjusted for inflation, and does not expose the purchaser to higher costs from adverse selection," they wrote.