Social Security Tools Can Help Maximize Benefits


Another positive feature of the AARP calculator is that it shows what percent of basic living expenses Social Security benefits will cover at different ages. In my test drive of the software, for instance, the calculator suggested by waiting to claim Social Security at age 70, the benefit would cover 95% of basic monthly living expenses (food, housing and utilities, clothes, transportation, health care, insurance and other expenses). By contrast, the benefit would cover only 54% of monthly expenses by claiming at age 62, and 75% of monthly expenses by claiming at age 66.

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One negative about the tool: The calculator allows you to change the overall rate of inflation for basic living expenses, but not the inflation rate for various monthly expenses, such as health care, which tends to inflate at a faster rate than other types of expenses, especially in retirement.

Another negative note: AARP's expense ratio calculation seems a bit high when compared to other research that suggests Social Security benefits cover much less than 54% of basic expense for the population at large.

Claim and Keep on Working?

One positive about the calculator is that it recognizes that many older Americans are earning income while collecting Social Security benefits. In fact, depending on one's race, earned income might represent anywhere from 35% to 48% of total income for those age 65 and older. AARP wrote a report on the subject (PDF).

Collecting Social Security while earning income can complicate the retirement-income planning process. Beneficiaries have to consider the effects of taxes, benefit reductions, and the like. The AARP tool does that.

"One advantage it has over every other tool I have seen is the ease with which it incorporates the effects of working before FRA," said Anspach.

How Long Will I Need Guaranteed Income?

If you knew your date of death, you'd know exactly how long you needed guaranteed income. Given that there's no answer to this question, the AARP does the best it can do by showing users the average life expectancy for the person using the tool.

So, for instance, those age 65 have an average life expectancy of an additional 18.6 years (19.9 years for females and 17.2 years for males). But as we all know, very few Americans die at average life expectancy. In fact, half die prior and half die later than the average.

The AARP calculator does address this very real issue. Users learn that a person born in 1955, for instance, has a 95% chance of living to age 75, 85% chance of living to age 80, a 65% chance of living to age 85; a 45% chance of living to age 90; and a 15% chance of living to age 95.

But many experts said AARP's tool could benefit from incorporating longevity risk into the program. For instance, Anspach said, "The tool may be missing one key component that does well, which is balancing the goal of maximizing benefits with the goal of protecting against longevity risk.

"AARP's tool seems focused on maximizing based on a long life; sometimes there is a hybrid strategy that provides substantial benefits in case of a long life, while also hedging against the risk of one or the other dying young," she said.

In the test case Anspach ran, if either spouse died young (between the husband's ages of 69 and 80) they would be missing out on significant benefits with the AARP claiming strategy, and they would only regain those if both spouses lived long. (The tool, although not free, delivers this hybrid recommendation, Anspach said.)

Meyer, not surprisingly, agreed. "The AARP calculator uses average life expectancies and assumes you are healthy," he said. "Overall, we feel mortality assumptions are one of the largest inputs. It needs to be personalized, and the user of a tool should evaluate different outcomes since consumers typically underestimate how long they live. We call this longevity risk and show claiming strategies that both maximize benefits, but are also a hedge if you live longer than you expect."

Room for Improvement

No online calculator is perfect. The simpler the tool, the less personalized and precise the results are likely to be. The more complex the tool, the less likely an average person will use it.

With its calculator, AARP has largely struck that fine balance between precision and usability.

But there is room for improvement, experts said. Meyer, for instance, said the AARP calculator is not flexible from his perspective. For instance, it does not allow the user to change the primary claiming strategy they deliver. "You can change inflation and some other general inputs, but the drivers such as the start date or spousal switching is not part of the calculator that the user can vary or change to see the impacts," he said.

The calculator from Meyer's firm, he said, delivers a recommended solution but individuals can and do change and personalize it to their situation, varying mortality, start dates, and the like.

Other experts also had ideas to improve the AARP tool. "I would recommend the AARP tool, and only wish it offered a bit more in the way of being able to compare one claiming choice to another," said Anspach. Then the consumer can evaluate and analyze the merits of different approaches.

For her part, Floyd said, "If I could add one thing to the tool, it would be to show benefit amounts in the future based on claiming decisions made today. For example, if the husband claims Social Security at 62, his surviving spouse will have an income of $X when she is 85. But if he delays to age 70, her age-85 income will be $X." She said the Horsesmouth Savvy Social Security calculators do show this, and it's a powerful illustration.

Fichtner said AARP's calculator does provide pop-ups with further information, including some links to the SSA website. But it's missing what Fichtner said is a useful SSA two-pager: When to Start Receiving Retirement Benefits. See it on SSA's site (PDF).

Make Up the Difference

For many would-be Social Security beneficiaries, the decision to claim or not rests largely on whether they can generate adequate income from other sources to make up the difference between what they would collect and what they need for living expenses.

For instance, in my test drive of the software, I would collect $1,822 in Social Security by claiming at age 62. All else being equal, a would-be beneficiary would need to generate at least that much from other sources, such as earned income and assets and accounts earmarked for retirement such as an IRA or 401(k). The tool doesn't quite address how a would-be beneficiary could make up the difference, or what the best strategies to employ might be. It simply suggests that waiting to collect will result in a larger benefit later.

It would be useful to provide users with tools, strategies and techniques to make up the difference, be it from earned income or other assets, such as IRAs and the cash value in a life insurance policy.

Other tools

There are several other calculators and resources online. Financial advisers might consider using Horsesmouth's suite of tools and books at this website.

For free tools, try the following sites:

The Social Security Administration's website

The Social Security Claiming Guide, offered by the Center for Retirement Research at Boston College

Tools are available for a fee on these sites:

Social Security Solutions

Maximize My Social Security

Will it Work?

At the end of the day, the real question is not so much whether AARP's calculator is good or not, but whether anyone will use it and, more importantly, whether it will change people's claiming behavior.

"Despite overwhelming evidence that delaying benefits is the optimal strategy, my conversations with advisers and pre-retirees suggest that people still want to grab their 'free money' at 62," said Floyd. "Reasons range from 'I need the income now' to 'I'd better grab what I can before Social Security runs out of money,' which is not a valid reason."

The fact that the AARP tool personalizes the claiming question and shows the consequence in terms of how much of your monthly expenses will be met by Social Security may or may not affect people's actual behavior, said Floyd.

"I sincerely hope it does," she said. "Otherwise the baby boomer retirement crisis could end up being just that: 20 to 30 years from now people living on reduced incomes because they were too shortsighted about when to claim Social Security benefits back when they were in their 60s." (The above was drawn from an article that appeared in a recent issue of Retirement Weekly.)

Robert Powell is editor of Retirement Weekly, published by MarketWatch. Follow his tweets here.

Robert Powell has been a journalist covering personal finance issues for more than 20 years, writing and editing for publications such as The Wall Street Journal, the Financial Times, and Mutual Fund Market News.

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