Social Security Choices

Financial Planning Horizon

No one wants to look forward to living their last years in poverty. Consequently, many people use financial planning consultants or financial planning calculators available on the internet to create a retirement plan that avoids exhausting their assets before they die. To develop such a plan, clients need to establish their "financial planning horizon;" that is, the period of time they want their financial assets to last. In order to determine your optimal age for claiming Social Security benefits, we also need to establish for you a financial planning horizon. We can provide information to help you make this decision about your planning horizon, but we cannot ultimately do it for you.

Let us digress briefly. With Social Security you do not need to worry about exhausting your benefits. Social Security benefits will be paid to you or your spouse as long as you live. You will not use them up as you might use up a balance in a 401k retirement account. Nevertheless, it is still important to establish a financial planning horizon for the following reason. The longer your horizon, the greater is the advantage of waiting past age 62 to claim your benefits. A short financial planning horizon increases the advantage of claiming Social Security benefits early. A long planning horizon tends to tilt the decision toward claiming benefits later on, perhaps as late as age 70.

Some financial planning consultants suggest that clients approaching retirement should use age 100 as their planning horizon. That is, they want clients to create a plan that allows for the possibility they will live to 100 years of age. For the average person, this strikes us as a very conservative approach, especially in regards to a decision about when to start Social Security benefits, although it may be appealing to some.

Table 1 below provides information on survival probabilities that you may find useful in thinking about this issue. Consider the group of Americans who are presently 62 years old. The numbers in Table 1 are estimates of the fraction of those currently age 62 who will survive to the various ages shown in the table. These percentages-or survival probabilities-are divided into sex and race groups.

Table 1: Percentage of individuals presently 62 years old expected to live to various ages, by sex and race
Longevity White Male White Female African-American Male African-American Female
75 years or more 75% 83% 65% 77%
80 years or more 58% 70% 47% 63%
85 years or more 39% 52% 29% 45%
90 years or more 19% 31% 14% 27%
95 years or more 6% 12% 5% 12%
100 years or more 1% 3% 1% 3%
Source: based on 2008 data from the Centers for Disease Control; see United States Life Tables, 2008.

For purposes of illustration, let's focus on white males who are presently 62 years old. The table shows that approximately 71 percent of this group will live to at least age 75 (with most living longer). About 15 percent will live to age 90 or more. Only about 5 percent will live to age 95 or more. And only 1 percent will survive to age 100.

Now, if you look at the last row of numbers (for "100 years or more"), you see that very few people will live to 100 years. This fact is the basis for suggesting that the advice of some financial planners regarding financial planning horizons is rather conservative for an average person.

You can think of the numbers in Table 1 as survival probabilities for an average 62 year old white male, white female, and so on. That is what population based numbers give you – a representation of the average person.

For those who differ substantially from the average, say, in terms of health status, the numbers in Table 1 can provide only rough guidance at best. For example, for people who have serious chronic health problems or who come from families of relatively short-lived individuals, the survival probabilities in Table 1 overstate their survival odds. In contrast, those who are in excellent health or come from families of very long-lived individuals, the survival probabilities in Table 1 understate their survival odds.