Met Life has released an online calculator to help people determine the best age at which to claim Social Security benefits. This is obviously a step in the right direction, given how many people choose to claim at 62, the earliest age at which retirement benefits available. As best I can tell, the underlying approach is taken from SSA's own retirement calculators, though Met Life tweaks it with gender specific life expectancies and a generally snazzier interface (including Snoopy).
In short, the user inputs their age, earnings and gender, and the calculator estimates their benefits and life expectancies at different ages. Users compare claiming benefits at age 62 with claiming at some higher wage (say, the normal retirement age or age 70). The calculator then calculates the break-even age -- the age at which total benefits received are equal between the two claiming ages -- and the probability of the user surviving to the break-even age.
First, if you're going to do a break-even analysis, total benefits should be calculated as a present value, meaning that the interest value of benefits is included, rather than simply summing benefits received in multiple years. Granted, SSA also simply adds up benefits, but this is wrong; no economist or actuary would do it this way.
Second, the break-even age approach isn't really the best way to choose a retirement age. Choosing your retirement age isn't a game in which you try to maximize lifetime benefits. Rather, you should retire at an age that provides you with an adequate income. Imagine, for instance, that you could maximize your lifetime Social Security benefits by claiming at age 62, but that your benefit at 62 would be below the poverty line. Would it make sense to claim then, or delay a few years to receive a higher benefit? Common sense says to delay, if you are able, but the considerations of benefit adequacy aren't accounted for in break-even exercises.
Third, the calculator doesn't take into account the annuity value of Social Security benefits. Retirement benefits are paid as an annuity, meaning that they last as long as you live. Annuities are very valuable compared to lump sums since they insure against the chance of outliving your assets. (So much so that even groups with below-average life expectancies, like black males, benefit from the Social Security annuity. See here.) By delaying claiming benefits, you're essentially "buying" more of the Social Security annuity. The insurance value of an annuity is hard to represent in an online tool, but it's worth bearing in mind research showing that a retiree would need a lump sum of around $150,000 to provide the same lifetime income security as an actuarially fair annuity with a premium of $100,000.
Fourth, the calculator doesn't tell the full story on the Social Security earnings test. It does note that early retirees with earnings above $13,560 will have their benefits reduced on a $1-for-$2 basis. What it doesn't tell is that at the full retirement age, Social Security not only stops reducing your benefits, but actually increases them to make up for benefits lost to the earnings test in earlier years. Over the course of a full retirement, total benefits are around the same. So the earnings test shouldn't discourage people from working while collecting benefits.
Overall, the Met Life calculator is a welcome addition to financial planning tools, particularly since it's designed to be easy to use. However, with improvements it could be significantly better.
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3 comments:
I find it endlessly fascinating that economists and insurance agents discount the value of leisure to zero.
If my time is worth $26/hour to my employer then presumedly it is worth that same amount to me. If I can afford to pay myself to spend the morning blogging and then the afternoon sipping a beer and watching CNN why shouldn't I make the rational calculation that I will draw more life benefit from that than from sitting in a cubicle?
I am a white collar guy taking a sabbatical from the work world and hanging around with a mostly older blue collar crowd. These people didn't live to work, they worked to live and by and large if offered the chance for eight more life hours (plus commute time) per day as opposed to being at the beck and call of some pointed haired supervisor tend to take it.
You could call it the Scrooge vs Mr. Micawber equation.
"“My other piece of advice, Copperfield,” said Mr. Micawber, “you know. Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery. The blossom is blighted, the leaf is withered, the god of day goes down upon the dreary scene, and—and, in short, you are for ever floored. As I am!”
While Micawber was on the wrong side of the ledger the concept is sound. Unless you simply love your job for itself, or desire to accumulate more and more material goods beyond those you already have, working beyond eligibility for early retirement only makes sense if you cannot pay your monthly bills.
For some people the adage 'He who dies with the most toys wins' makes sense. I feel kind of sorry for people who reduce life to simple materialism and lifetime income and so would make their retirement plan depend entirely on the numeric result of a calculator.
I don't know how financial advisers handle the value of leisure time, but economists certainly do look at it. Roughly, you'd continue working until the marginal utility of your hourly pay equals the marginal utility of free time. (As you work more you earn more, so the welfare value of an additional dollar of pay declines, but you have less free time, so the value of leisure rises.)
The question here is a bit more limited: is there an age that maximizes your lifetime Social Security benefits? Clearly, retiring after age 70 makes no sense, because there are no adjustments for claiming after 70. But for a typical person, it doesn't really matter when you claim benefits between 62-70; the present value of total lifetime benefits will be around the same. But as I noted in the post, I think there are other issues that really are more important than simply maximizing your benefits.
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