T Rowe Price Social Security Benefit Calculator: A Broken Tool

T Rowe Price recently rolled out a new Social Security benefit calculator. Unfortunately, their calculator is not ready for prime time. In fact, in its current state, it is not ready for any time. It gives incomplete and misleading advice that, if followed, could cost some married couples \$100,000 or more.

I will illustrate some of the problems with the T. Rowe Price (TRP) Social Security calculator with data for a hypothetical married couple, John and Mary. I assume John and Mary were born in 1952 and 1954, respectively. John’s life expectancy is 83; Mary’s is 95. John’s Social Security benefit at his full retirement age (FRA) is \$2000 a month, while Mary’s is \$100 a month.

Example #1

For this example, I selected the following as this couple’s goal: “We want to maximize the survivor benefit and also receive income early, if possible.” (The TRP calculator allows a user to select among several goals.)

Here is the set of recommendations from the T. Rowe Price calculator:

1. Mary claims retirement benefits at 62, receiving approximately \$900 per year.
2. When John turns 66, he files a restricted application for spousal benefits, receiving approximately \$600 per year.
3. When John turns 70, he claims his own retirement benefits, receiving approximately \$31,680 per year.

And that’s it.

Do you see a problem here–a really big problem?

The T. Rowe Price Social Security calculator has failed to include a recommendation that Mary should claim a spousal supplement as soon as John turns 70. At that point, she could pick up an extra \$10,800 a year in spousal benefits. These spousal benefits would continue until John’s expected death at age 83, implying that the T. Rowe Price Social Security calculator has mislaid about \$140,000 in this case!

That’s an amazing–really, inexcusable–oversight.

Example #2

For this second example, I assume that Mary’s retirement benefit at her FRA is \$900 per month. Other personal characteristics remain unchanged.

For the couple’s goal, I assume that John plans to retire at age 66 and that Mary plans to retire at 70.

Here is what the TRP calculator recommends:

1. John should file for his retirement benefits at age 66, receiving approximately \$24,000 per year.
2. Mary should file for her retirement benefits at age 70, receiving approximately \$14,256 per year.

Again, that’s it.

And, again, I ask: do you see a really big problem here?

The TRP calculator fails to mention that Mary can claim spousal benefits at age 66, using a restricted application and letting her retirement benefits grow until age 70. These spousal benefits would equal \$12,000 a year, or \$48,000 between age 66 and 70 Mary.

I have not yet thoroughly investigated the TRP calculator. But, from what I have seen, it is easy to conclude that this calculator is seriously broken.

For an example of a calculator that actually works, go here.

On Social Security, Birds, Bushes, and Hands: The Time Value of Money

Many people we encounter are dead set on claiming their Social Security retirement benefits immediately when it becomes available. They often use some variation of the well-known proverb: a bird in hand is worth two in the bush. In citing this proverb, these individuals are expressing a rational preference for money now over money later. A quick web search suggests that the bird in hand phrase dates to the 13th century, so its originator certainly never had to worry about when to claim Social Security benefits. It’s worth thinking about how this proverb applies to the Social Security claiming decision.

Taken literally, the statement suggests an exchange rate of one bird in hand for every two birds in the bush. We can think of this exchange rate between bird in hand and birds in the bush in terms of the “discount rate.”

Instead of birds, let’s talk about something we’d rather have in our hands: \$100 bills. Furthermore, let’s assume that \$100 bills currently in the bush will be in our hands one year from today. With these assumptions, our proverb becomes: \$100 today is worth \$200 next year. This represents a 100% discount rate, because it implies that a 100% return on the initial \$100 is needed for one to break even. Needless to say, this is a very high rate, and most people would be willing to accept far less than \$200 next year for \$100 today. So, the bird in hand proverb may not provide the best guidance, at least when taken literally.

When taken figuratively, though, the proverb illustrates the reasonable preference for money now rather than money later. To most people, money received today is indeed worth more than money received next year, because they may wish to spend it now, or if not, they can invest it for a positive return. While almost everyone would give up \$100 this year for \$200 next year, almost no one would give up \$100 this year to receive only \$100 next year. The question of how much money one demands next year in order to give up \$100 today will elicit different responses from different individuals, even if we ignore inflation, and there is absolutely no risk of next year’s payment not being made on time. Some people might be willing to trade \$100 today for \$101 next year, while others might demand \$110 or more. For our Social Security reports, we settled on \$103 as the amount that the typical person would demand next year in return for \$100 today, which represents a 3% discount rate. We chose 3% because it is the approximate return on long term U.S. treasury bonds, which are considered to be an extremely safe investment (like Social Security). In our analyses, our 3% annual discount rate accounts for a moderate preference for receiving money in the present.

The discussion gets more complex when one is dealing with multi-year trade-offs. For example, a single person claiming at 70 instead of 62 gives up benefits for years 1 – 8, and then gets a larger payment in each subsequent year. A married couple might have to decide between claiming at 62 or implementing one of many special strategies, which would result in them giving up all benefits for a few years, getting smaller benefit payments for a few years, and then getting larger benefit payments in each subsequent year. Invoking our proverb, we’re now trying to determine whether two birds in hand is worth more than a bird in a nearby bush and a four birds in a slightly more distant bush!

The relative values and proximities of these “birds” will vary from situation to situation, but the takeaway point is that the birds in the bushes are sometimes considerably more desirable than the bird in hand under standard discount rates. By implementing special strategies, it is often possible to get considerably more from Social Security, even after incorporating the discount rate. Some may choose the bird in hand in spite of considerable returns on strategies that involve delayed claiming, but no one should make this choice blindly. Everyone has their tipping point. For example, what those two birds in the bush are geese that lay golden eggs? Do you still prefer that seagull in your hand?