How a 401(k) 'Bridge' Can Allow Annuity Haters to Delay Social Security Claiming

What You Need to Know

Delaying Social Security allows benefits to grow, but few 401(k) participants are willing to use an annuity to do so.
When workers in a study were offered the chance to use 401(k) assets as a bridge to Social Security, about a third of them said they’d choose to do so.
Those who were defaulted into a bridge allocated the largest amount.

Annuities may get a lot of attention lately, but for the most part, people aren’t buying them, a new study finds. Noting that the market for annuities is minuscule, researcher from the Center for Retirement Research at Boston College wanted to determine what individuals could do to mimic the “bridge” to Social Security that annuities offer, by using assets from 401(k) accounts.

“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,” authors Alicia H. Munnell, CRR director, and Gal Wettstein, a CRR senior research associate, wrote in “Would 401(k) Participants Use a Social Security “Bridge” Option?”

Using one’s 401(k) assets to delay the need to claim Social Security, thus increasing its payout, has been much discussed by the advisory industry. The study found that a “substantial minority” of 401(k) participants, about a third, were interested in this bridge option, especially if it was a default in their defined contribution account.

“Without some guidance, retirees risk spending too quickly and exhausting their resources or spending too slowly and depriving themselves of necessities,” the authors noted. “They must also decide how to invest their assets.

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“For decades, academics have argued that using at least some 401(k) assets to buy an annuity can significantly mitigate these risks,” they noted. “But few plans offer options to annuitize, in part because only a small fraction of participants use them even when they are available.”

Inside the Study

Delaying taking Social Security past full retirement age increases benefits by 8% per year until age 70, so retirees who use a 401(k) assets as a bridge to claiming can essentially “buy a higher Social Security benefit,” according to the authors.

The 1,349 respondents in the online study had at least $25,000 in their 401(k) accounts, were 50 to 65 years old and were not yet retired.

The study looked at four groups: 1) those who were provided limited information on the bridge strategy, 2) those who received “explicit” pros and cons of the bridge, 3) those who received a detailed explanation of the bridge option and 4) those who had the bridge as a default choice, with the ability to opt out or make changes to the allocation.

As the researchers noted, “the potential for enhancing annuity income through Social Security is substantial, since the majority of retirees claim before their [full retirement age] and about 95% claim before age 70,” according to the Social Security Administration.

Breaking the Link

The bridge option would help “break the link between retirement and claiming, since it is designed specifically to allow workers to exit the labor force without simultaneously claiming benefits,” the authors stated.