The New Social Security Benefit Calculator as a Reality Check

July 25, 2008 by  
Filed under Retirement Planning

Baby boomers and others thinking ahead about retirement have requested and have waited patiently for the yearly delivery of their hard copy Social Security earnings record and benefit estimate.  My statement arrives each September.   The benefit estimate information in this document can be useful in several different ways.

First and foremost, it is a reality check for middle class retirees who expect to rely heavily on Social Security to maintain their lifestyle in retirement.  This reality check is particularly important for a prospective retireee who is considering receiving his or her retirement benefit at age 62, the age of initial eligibility.   Statistically, 50% of retirees do this.  For many, that is a huge financial mistake. (More about this in a minute.)

Just recently, the government launched a new online Social Security retirement benefit calculator. Unlike benefit estimators previously available, the new benefit calculator uses your actual earnings history.

So, to use the calculator you have to identify yourself by providing your SS number and some other identifying data.   You are then asked to enter your most recent year’s earnings.   In a few seconds, the calculator outputs a page that looks like this:

Your Retirement Benefit Estimate

At your current earnings rate, if you stop working and start receiving Social Security benefits…

At age 62, your monthly benefit will be about…$1,699.00.

At full retirement age (66 Years and 00 Month(s) for you), your monthly benefit will be about…$2,315.00.

At age 70, your monthly benefit will be about…$3,104.00.

Now what provides the extra reality check for retirement planning purposes is that the hard numbers demonstrating the benefit of waiting to apply for Social Security are staring you right in the face.  I’m guessing that a lot of folks never even request a paper benefits estimate before they make a decision to retire at 62.

Much has been written (and financial planners know) that for each year you delay past your full retirement age (up to age 70), you gain an additional 7% in benefits.  For many folks, it is much more effective to talk about this in real dollars, as applied to their real benefit.  In the example shown above (mine), the prospective retiree can see immediately that his/her plan for retiring at 62 will cost $1400 per month in benefits, for life.  This difference is even more significant if: (a) you take into account that the benefit is adjusted for inflation; and (b) a dependent spouse may really need that extra $1400 to in survivor benefits after the retiree dies because the death of the retiree leaves only one benefit coming into the household.

In short, taking Social Security at 62 can be an irrational money decision for lots of middle class retirees.  Thank you Social Security Administration for creating this online tool that makes it easier and faster to demonstrate that.

Here is some helpful information on choosing the best age to start Social Security.

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