Avoiding a Common Social Security Planning Mistake

Mike Piper for the Oblivious Investor writes: When you look at your Social Security statement (if you receive it in the mail) or youronline Social Security account, you will see three figures:

• An estimated monthly retirement benefit if you claim at age 62,
• An estimated monthly retirement benefit if you claim at your full retirement age (FRA), and
• An estimated monthly retirement benefit if you claim at age 70.

One of the most common mistakes I see when it comes to Social Security planning is to use these numbers without understanding the assumptions that go into them.

To be more specific, what many people overlook about these figures is that each of them is calculated based on the assumption that you will continue working — at your current rate of earnings — right up until the date at which you claim benefits. In other words:

• The at-62 figure assumes you will work until age 62, then claim benefits,
• The at-FRA figure assumes you will work until FRA, then claim benefits, and
• The at-70 figure assumes you will work until age 70, then claim benefits.

But these three scenarios might not be a match for the retirement scenarios you are considering.

For example, if you retire at age 60, but wait until age 70 to claim your retirement benefit, the actual amount you receive per month could be significantly lower than the age-70 benefit listed on the statement, because you would have 10 fewer years of earnings history than what is assumed in the at-70 figure on the statement.

In effect, the SSA statement bundles the when-to-claim-benefits decision together with the when-to-retire decision.

If you want to do an analysis solely of the when-to-claim decision, it typically makes sense to use the figure on the statement that assumes a retirement date closest to the age at which you actually plan to retire, then adjust that benefit upward or downward as needed to figure out the amount you would receive if you claimed at a different point in time. For example, if you plan to retire at 62 you would want to:

• Look at the age-62 benefit provided on the statement to get the benefit you would receive if you claim at 62,
• Multiply the age-62 benefit from the statement by 1.33 to get the benefit you would receive if you claim at 66, and
• Multiply the age-62 benefit from the statement by 1.76 to get the benefit you would receive if you claim at 70.

If you plan to retire at an age other than 62, full retirement age, or 70, you can use the SSA’s “Any PIA Online Calculator“ or “Retirement Estimator” to get the applicable benefit figures. (Both of these calculators assume, however, that you will claim benefits at the later of age 62 or the date at which you retire. So you will still have to do your own math to adjust the calculator’s output to find what your benefit would be if claimed at different ages.)