The first article in this series, “Calculating the Pluses and Minuses of Filing for Social Security Before or After 65: Learn How to Make the Optimal Choice,” covered the basics of getting a rough estimate of Social Security benefits depending on the age you begin. Besides the methods mentioned, anyone can get a personalized benefit estimate by calling the department at 1-800-772-1213 and requesting Form 7004 or downloading the form from www.ssa.gov (See Additional Resources).
Those with a need for a more exact estimate should consider some other factors. These include the effect of time and interest rates on savings; something the economists refer to as the opportunity cost; and your own health status and estimated longevity. Another consideration in calculating total retirement income is the question of whether you continue to work, which may result in having a portion of your Social Security benefit taxed. Marital status and spousal Social Security income may be involved as well. The additional complications introduced by these last two go beyond the parameters of this article. However, the same principles explained below apply.
Signing the Social Security Act of 1935
No matter how you derive an estimate, even before starting on this work you should try to get a clear picture of anticipated retirement income needs. Numerous books and websites give some guidance. Free retirement online calculators at some mutual funds companies provide helpful information. The ones at the Vanguard site are good examples (See Additional Resources). One calculator works through anticipated monthly expenses to get an idea of needed income. Another calculates anticipated retirement income from all sources. These issues impact whether you choose to take an early benefit, wait for the full amount, or delay filing.
If ill health forces you to retire before 62, it is worth considering filing for Social Security disability benefits immediately. The amount is the same as a full retirement benefit. Beyond this, if a medical condition exists suggesting a shorter life span than standard longevity tables, it may make sense to file for Social Security as soon as possible. For single men or single women, sometimes it makes more sense to file early if you are a man or later if a woman because women tend to live longer than men do. In the absence of these extremes, consider calculating some odds using online sources like those at investment companies The one at Vanguard is interesting because it calculates the joint probability of at least one of a couple living at least a selected number of years based on the age of each. The calculator at MSN Money is more detailed. Even better, use one of the more sophisticated scientific calculators based on studies of cardiovascular disease risk such as the Framingham Heart Study (See Additional Resources). Even if you do not base the decision on when to retire on the results, if nothing else they may help improve your chances of living longer.
Unless Social Security income will be the sole source of retirement money, take into account not only other pensions, but savings and investments as well. Multiple online sites that calculate current net worth and project future net worth are a good way to determine whether you can afford to wait for full Social Security retirement age or even longer. One of these is the “Personal Wealth Estimator” from America Saves (Consumer Federation of America). The U.S. Department of Agriculture Financial Security web page recommends this source (See Additional Resources). There are also easy to find financial calculators online (search “financial calculators”) that will tell you how much your savings or investments will grow at specific interest rates. If filing early allows you to save a bit of income, then the growth from interest may help even out things later. Use this information in decision-making about whether to start getting Social Security early.
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.
These additional elements in the decision-making process are not always quantifiable in terms of money, but they should play an important role in a thoughtful analysis of one of the most important (and irrevocable) decision you can make about retirement.
Charles R. Anderson, Consultant
This post is part of the series: How to Make the Best Decision about When to File for Social Security Benefits
Deciding whether to file for Social Security income at the earliest age, 62, sometime between 62 and full retirement age, now 66, or even a few years later is more than a matter of using the Social Security Administration’s benefits calculator. Use the hints in this series for a more accurate idea.