How Time Horizon and Discount Rate Affect Social Security

One way to view the decision to delay Social Security as an “investment” is by using a present value calculation to identify which strategy can provide the most lifetime Social Security benefits and which strategy creates the lowest funding needs for your investment portfolio. This calculation requires deciding on a time horizon and a discount rate.

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Calculating Social Security Retirement Benefits

I will discuss the philosophy of claiming strategies later, but first, it is meaningful to first consider how retirement benefits are calculated.

The Social Security Administration has now followed the same approach for calculating benefits since 1979.

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Introducing the Social Security Claiming Decision

For the vast majority of Americans, Social Security benefits serve as the core of a retirement income strategy. As a government-backed, inflation-adjusted monthly income for life, Social Security benefits help to manage longevity risk, inflation risk, and market risk.

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A Brief History of Social Security

Recipients of Social Security benefits today are not just retirees – they’re disabled workers, spouses and young children of deceased or disabled workers, and the spouses and survivors of retirees. This was not always the case.

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What Does Retirement Mean?

Retirement has changed. It’s no longer about getting your gold watch and playing golf all the time. Retirement is now a frame of mind – you’re retired when you can do what you want. It doesn’t necessarily have anything to with whether you are drawing a paycheck or not. Retirement is the freedom to decide what you want to do. At the same time, retirement has also gotten longer. You could very well be looking at a retirement that lasts 30 years or more, making retirement even harder to plan for than it was before.

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