Opportunity cost is a term probably known mostly by economists. However, everyone deals with opportunity cost when making any sort of decision about where to spend money or time. Opportunity cost is the cost of foregoing the next best opportunity, which includes both tangible and intangible costs. If you spend time and money on one activity or resource, then you cannot spend that time or money on what would have been the next most valuable activity or resource. For example, perhaps you have X amount of money to spend either on a short vacation and the next best alternative is putting it into savings. If you go on the vacation, then the opportunity cost the loss of interest on savings and the intangible benefit of adding to your financial security.
You may want to factor this into a decision about when you file for Social Security. For example, perhaps starting benefits early will allow you to relocate from frigid winters and blistering summers to a retirement community in a more weather-friendly Southwestern or Southern state. The opportunity cost of not taking early benefits is the longer period spent living in an environment perhaps increasingly difficult for seniors coupled with other costs such as in increase in the cost-of-living where you are. These might include rising heating costs and potential adverse effects on health.
One other example of how opportunity cost affects retirement choice is the way Social Security calculates benefits. Payments are based on the highest-paying 35 years an individual spends working. Each additional higher-paying year worked after 62 can wipe out an earlier lower-paying year. You need to calculate whether the immediate reduction of Social Security income before full retirement age is a lesser cost than the increased benefit from one more higher-paying year. On the other hand, if the additional year(s) are not better than early ones, the decision can go the other way.
