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By Jason Stipp | 07-11-2012 01:00 PM

Tips on Handling Today's Retirement Challenges

J.P. Morgan's Katherine Roy analyzes behavioral trends she's seeing among retirees and pre-retirees, including when to claim Social Security, having an adequate savings target, preparing for inflation, and much more.

Jason Stipp: I am Jason Stipp for Morningstar. Retirement and challenge are two words that shouldn't have to go together, but unfortunately for today's pre-retirees and retirees the pairing is very common. We checked in with Katherine Roy at J.P. Morgan Asset Management's recent investor conference here in Chicago to learn a little bit about the behavioral decisions that people make about Social Security as well as the very difficult inflation environment for retirees and also the realities about working longer.

Katherine, Social Security is a centerpiece for a lot of folks in their retirement planning, but it's also something that you need to formulate a strategy for. What are some of the ways that investors can maximize their Social Security payout, and what are some of the pitfalls that they may encounter as they're planning how they want to take Social Security?

Katherine Roy: We think it's really important that people understand the basics of Social Security and the fact that the Social Security Administration will give you an 8% increase for every year you wait to claim. And so for example, today a 62-year-old in 2012 is eligible for roughly $1,800 a month if they claim at age 62. If they wait until age 66, because of that 8% plus cost-of-living increase, but if you just take the 8%, they would be eligible for about $2,500 per month, which is a pretty sizeable increase. If they wait until 70, it goes up as high as a little north of $4,000 a month, but clearly there is the cost of waiting. So having other sources of income is really important if you're able to wait and are interested in waiting longer.

I think what we find interesting is research that looks at how people actually claim and what, as an advisor, people might be seeing or from what they get from the Social Security Administration in terms of their statement. The way in which the people's benefits are presented to them might not be optimal in terms of how they actually translate that information. For example, there has been a body of research that was done by [Wharton School professor] Olivia Mitchell that focuses on testing simply anchoring people differently. So, if you started instead of kind of as I walked you through 62, 66, or 70 starting and saying as an individual at age 70, you are eligible for $4,000 and then walking back to the 66 and 62, people are more open to waiting and looking at other alternatives.

Likewise, if you position again the 8% increase as an investment gain or you understand that's a gain in the amount that you're going to receive versus claiming earlier as a loss of income or investment loss, people are just much more open, and it creates somewhat of a neutral playing field. What we do see is that in actual behavior, people are claiming early, so majority of Americans do claim as early as possible, and as we work with financial advisors, we clearly see that there is an emotional trade-off in terms of mathematically we can do our best to help people understand that if they have longevity in their family, waiting and having the maximum benefit they could receive will help them get the most they can out of Social Security. But in reality lots of times, individuals are just very nervous about tapping their portfolios, and turning on that benefit from the government is just emotionally an easier thing to do.

I think the other thing we hear is that people want to make most of their retirement, and they don't necessarily want to have more money later, particularly at different affluence levels. So, it is an emotional, as well as a mathematical question. So the more you can think about it in a neutral frame, have the right current behavioral-finance techniques to understand what the benefit is, and make the right choice for you, is the most important thing.

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