PLANSPONSOR - June/July 2018 - 53

through 34. The figures lead to another
counterintuitive realization, Biggs says:
Low-income working-age Americans are
about one-third more likely to have an
income below the poverty line than are
retired Americans.
So, what's the rub for retirement
plans? As Biggs sees it, if these lowincome
individuals are automatically
swept into retirement plans that assume
everyone should be nudged to save more
and maximize tax-deferred investments
at all points on their career path, they may
actually suffer for it in terms of financial
stability, both in the short and long term.
The Challenge
According to Biggs, an important element
to consider when talking about retirement
planning for the lowest-income workers-
who comprises that group being hard to pin
down, as the defining lines keep shifting-
is how the accumulation of 401(k) or IRA
balances interacts with means-tested
government benefit programs. With such
welfare programs instituting asset test
limits as low as $1,000, lower-income
households that participate in retirement
plans could actually lose eligibility for key
benefits, he warns.
" Especially later in life, the drawdown
of IRA balances could trigger incomebased
means tests, " he explains. " Loss of
transfer benefits could make participation
in an auto-enrollment plan a financial
loser for certain low-income households. "
The federal and state governments
sponsor a wide variety of means-tested
transfer programs, Biggs notes, but the
most relied upon include Medicaid,
Temporary Aid for Needy Families
(TANF), the Supplemental Nutrition
Assistance Program (SNAP)-commonly
referred to as food stamps-Supplemental
Security Income (SSI), Section 8 Housing
Assistance, and the Low Income Home
Energy Assistance Program (LIHEAP).
These benefits can be subject to both
asset and income tests, with asset-based
eligibility restrictions differing by state
but usually in the range of $1,000 to
$3,000, Biggs says.
" Data from the Survey of Consumer
Finances for 2013 show that, among
employed households aged 21 to 64 with
neither a retirement account nor entitlement
to a traditional defined benefit [DB]
pension, 41% received transfer income
that might be subject to an income or an
asset test, " he observes. " Such transfer
income can include unemployment benefits,
alimony or child support, TANF, SSI,
SNAP or other welfare benefits. "
According to Biggs, for households
with earned income below $35,000, 48%
received transfer benefits in 2013.
" Thus, there is likely a significant
overlap between non-saving households
and those receiving transfer benefits
that may be subject to means tests, " he
concludes. " Even at low contribution rates
and modest investment returns, it would
not take many years for low-income automatically
enrolled participants to bump
up against common asset thresholds. "
The Solution
According to Biggs' research, it is crucial
for low- and middle-income earners to
have a better understanding of Social
Security and how their private savings
may interact with means-tested benefits.
It seems strange to say it, but many of the
lowest-income workers could potentially
be better served, from the lifetime income
perspective, by backing out of auto-enrollment
plans.
" While Social Security's progressive
benefit structure is highly beneficial
for low earners, the program offers no
strong guarantee against poverty in old
age, " he advises. " Moreover, quirks in the
Social Security benefit formula mean that
households with the same lifetime earnings
and contributions to the program
can receive significantly different replacement
rates and levels of social protection. "
Other experts agree it is crucial for
lower-income employees to understand
how their timing to claim Social Security
can have a surprisingly dramatic impact
on the amount of monthly income they
will receive. One such expert, Anne
Lester, head of retirement solutions for J.P.
Morgan Asset Management in New York
City, calls 'when to claim' one of the most
critical point-in-time financial decisions
an individual will ever face.
" In 2017, full retirement age began
transitioning from 66 to 67 by adding
two months each year for six years, " Lester
noted. " This makes claiming early result
in an even greater benefits reduction. "
In her firm's " 2018 Guide to
Retirement " publication, Lester lays out a
comparison of the optimal claiming age
based on an individual's expected rate
of investment returns mapped against
expected longevity. It is quite a complicated
bit of math going into the calculation,
Lester agrees, but the result is
compelling and, when in graphical form,
clearly shows how the lower an individual's
expected long-term investment return
and the longer his life expectancy, the
more it pays to wait to draw his first Social
Security check. -John Manganaro
KEY POINTS
* According to 2015 Census Bureau data, low-income working-age
Americans have about a one-third greater chance of earning
below the poverty line than do retired Americans.
* How a 401(k) or individual retirement account balance interacts
with government benefit programs is an important element when
considering retirement income planning for lower-income workers.
* The timing to claim Social Security can dramatically affect
the amount of monthly income a retiree will receive; it is vital
that workers understand this.
PLANSPONSOR.com June-July 2018 53
http://www.plansponsordigital.com/plansponsor/june-july_2018/TrackLink.action?pageName=53&exitLink=http%3A%2F%2FPLANSPONSOR.com
PLANSPONSOR - June/July 2018

Table of Contents for the Digital Edition of PLANSPONSOR - June/July 2018
