Today, the Consumer Financial Protection Bureau (CFPB) launched a new online resource designed to help consumers optimize one of their most important income sources in retirement: Social Security.
The CFPB’s “Planning for Retirement” tool helps consumers decide when to claim their Social Security benefits, by enabling them to estimate how much money they can expect to receive at different ages, while also providing tips to help consumers evaluate the trade-offs between drawing benefits earlier as opposed to later in life.
In essence, the new resource is meant to help consumers clearly see their options, says CFPB Director Richard Cordray.
“Millions of Americans are likely to face financial insecurity in their retirement years,” Cordray said in a written statement issued Thursday. “Deciding when to start claiming Social Security benefits is one of the most important financial choices a consumer will make.”
A report released by CFPB in conjunction with the Planning for Retirement tool reveals that many older Americans are relying on Social Security for more of their income and for a longer period of time, but they end up receiving lower monthly benefits by claiming early.
Americans become eligible to claim Social Security benefits without any reduction at their “full retirement age,” according to the Social Security Administration. For people born after 1942, this “full retirement age” ranges from 66 to 67, depending on the year they were born.
Consumers can claim benefits early, however, they receive less money each month. On the other hand, some people may wait several years after reaching “full retirement age” so that they may receive bigger monthly checks.
“Generally, the amount a consumer receives from Social Security is a one-time choice,” says the CFPB. “This means if a consumer claims the reduced or increased benefit, they receive that amount for the rest of their life, with annual cost-of-living adjustments. This decision also impacts the benefits an older consumer’s surviving spouse will receive after their death.”
The CFPB report, however, indicates that many consumes may not be taking advantage of their option to receive higher Social Security income, and ultimately, a more secure retirement.
Annually, more than 2 million consumers make the decision of when to begin collecting Social Security retirement benefits, according to a CFPB analysis of Social Security Administration data.
Furthermore, approximately two-thirds of the nearly 40 million Americans age-65 and older who receive Social Security depend on those benefits for half or more of their retirement income, said Cordray in his prepared remarks Thursday while speaking at a retirement event at the Brookings Institution in Washington, D.C.
“Social Security is particularly important for the growing number of beneficiaries who are age 80 and older, since it accounts for about 70% or more of their income,” he said.
Many retirees begin collecting their benefits at their earliest eligibility age, according to the CFPB report. In 2013, nearly 46% of Social Security claims were submitted at age 62. Considering Americans, on average, reaching age 65 today will live to age 85, this means consumers will likely need sufficient income to last them 20 years or more in retirement.
A looming unpreparedness among American nearing retirement stands in the way of saving effectively. The CFPB report highlights four in 10 Baby Boomers (ages 51-59) are reaching retirement with limited or no savings, and are projected to face a savings shortfall.
“In addition, retirement years may be more expensive than retirees expect as many will incur increased health and housing expenses in their later years, and many carry mortgages and other debts into retirement,” CFPB states in its report.
With the decline in coverage from traditional defined-benefit pension plans that pay a regular monthly payment, reliance on Social Security is critical for an estimated 69% of older consumers, notes the report.
Studies have shown that people who claim Social Security benefits before their full retirement age have more limited knowledge of their benefits and claiming options, compared to those who claim at their full retirement age or after, Cordray said.
For example, one study found that only 22% of pre-retirees knew their full retirement age, while only 12% knew how their benefits would change if they claimed before, at, or after that age.
“This tells us that misunderstanding and confusion about the facts are hindering many Americans as they try to make informed decisions about this key element of their retirement futures,” Cordray said.
With the new Planning for Retirement tool, consumers can input their date of birth and highest annual work income to see their estimated monthly Social Security benefits based on their claiming age. They can also see the differences in benefits associated with claiming at age 62 versus age 70.
The tool also provides tips to help users consider the relationship between claiming age and other factors, such as marital status, other expected income sources, plans for working after age 60, as well as general expectations of longevity.
An example the CFPB provides details, on average, that Social Security replaces 40% of a worker’s income. This means a consumer’s retirement savings, pension, 401(k), Individual Retirement Account or myRA will need to fill the gap.
“Claiming at the full Social Security benefit age or later can minimize this gap and maximize a consumer’s monthly benefit,” CFPB notes. “If a consumer claims before their full retirement age, their monthly benefit could be reduced by as much as 30 percent.”
The release of the Planning for Retirement tool is part of a larger initiative aimed at improving the financial education of older Americans and the friends, family and caregivers who assist them in financial decision-making.
Earlier this week, Cordray spoke at the American Bankers Association’s Annual Convention in Los Angeles, detailing several initiatives his agency is undertaking to help older Americans—as well as young people and working Americans—improve their financial literacy.
Specifically, the CFPB released a series of plain-language guides for “lay fiduciaries,” or individuals who are key financial decision makers for aging loved ones. Each guide provides tips and answers to everyday questions to help people who are managing someone else’s bank account, applying for federal benefits, and sharing information with family members.
“As Americans, we cherish our rights of life, liberty, and the pursuit of happiness,” Cordray said at the ABA event. “Good financial education can take us a long way down that pathway. Knowing how to save money and make the most of your money can imbue people with a sense of control, ownership, and peace of mind.”
Written by Jason Oliva