Financial planning often turns on how choices are framed

How choices are framed has a surprisingly large effect on individual decisions, including financial ones. For example, we all know we should be saving for retirement. Given the choice the rational employee would participate in their employer's 401(k), right? Yet how the 401(k) choice is framed has a surprisingly large effects on participation rates.

When new employees are automatically enrolled in the 401(k) unless they choose to "opt-out" of the plan, very few people pick the opt-out option. Such plans have participation rates of 88 percent on average, according to T. Rowe Price. Yet opt-in plans have participation rates of just 48 percent.

The importance of framing financial decisions was a theme at this month's 2018 Retirement Research Consortium meeting in Washington D.C. The conference brings together many of the country's leading economic researchers of Social Security and pensions. Not surprisingly, most of the experts at some point in their talk noted the wisdom of claiming Social Security at age 70 rather than 62, the earliest date to apply.

The reason is compelling: The benefit is more than 75 percent higher if filed at age 70 vs. 62.

Put somewhat differently, let's say your full retirement age is 66 years. Your Social Security benefit improves by 8 percent each year you delay filing until age 70. (There is no additional gain past age 70.) That's a difficult benchmark for any professional financier managing a well-diversified portfolio to beat.

The financial returns to waiting on claiming Social Security is a major factor behind the growing embrace of work well into the traditional retirement years.

Here is where framing comes in. The standard advice about claiming Social Security typically starts with the earliest you can file — age 62. The conversation ends noting that you can delay up to age 70 and the wait is financially savvy.

Why not reverse the conversation? Start with the financial returns to filing at age 70. End the conversation noting you can file earlier all the way down to age 62. There can be good reasons for claiming early, including bad health, long-term unemployment and family demands. I would just frame the choice differently.

For the typical worker, the most important financial decision they make is when to file for Social Security. The best framing for this critical decision is that later is generally better than earlier. The more that message gets out the more people will receive a higher Social Security benefit.

Framing matters.

Chris Farrell is senior economics contributor, "Marketplace," commentator, Minnesota Public Radio.