Calculating Retirement Benefits
This calculator can be used to decide if someone should delay Social Security (in the United States) or benefits from any other retirement plan. The calculator needs a total of eight inputs, broken down into five sets of data including:
- An “early” retirement age, and the annual benefit if this choice is made by the user. Typically, early retirement would result in a reduced benefit
- A “normal” retirement age, and the annual benefit if this choice is made by the user. In this scenario, the annual benefit might be viewed as the user’s “full” benefit
- A “delayed” retirement age, and the annual benefit if this choice is made by the user. Delaying retirement usually translates into a higher-than-normal benefit
- The user’s final benefit age. This is the age at which benefits would stop flowing to the user and / or their family
- A return on investment. This calculator allows for the possibility the benefit is saved and is allowed to earn a rate of return (more on how to use this feature later)
The calculator then provides the user with three outputs:
- The future value of each retirement scenario if a value greater than zero is entered for the return on investment.
- If the user enters zero for the return on investment, the calculator provides an estimate of the total benefit derived from each scenario
Retirement benefit calculations
While some people may believe there are large differences in retirement benefits from government-sponsored programs such as Social Security in the United States depending on when the benefit is first received, this is simply not true. These calculations are performed by experts, such as an actuarial, who are asked to make each scenario “fair” to the benefit recipient. One of the more important factors an actuarial considers is how long the benefits will be paid. For example, if a program participant has a choice of taking their benefit at age 62 versus 70, the actuarial needs to adjust each benefit since the person receiving a benefit at age 62 will enjoy eight additional years of income. The actuarial also needs to consider the 70-year-old may be contributing a share of their income into the system for eight additional years. Therefore delaying receipt of the benefit will always result in a higher annual benefit.
Annual benefits versus total benefit
As mentioned, the actuarial will make certain assumptions when determining the early, normal, and delayed benefit. The same holds true for the total benefit received. At the extreme, if someone decides to delay receiving a benefit and passes away before benefits begin, they would have received zero total benefits. This is why the calculator needs the user’s final benefits age. Someone that believes they will receive benefits until the age of 90 will have a very different result than someone that receives benefits until the age of 75. Playing several “what if” scenarios with this calculator will provide some insight into those differences.
Return on investment
Our calculator has a return on investment feature not found on similar tools. Some users will consume all the benefits each year, while others might be lucky enough to save some of this benefit and pass it on to their heirs. If you intend to consume all the benefits, then enter zero for the return on investment because the money will not be put to work and earn a return. If you intend to save all of the benefits, then enter an estimate of the return. Finally, if you think you’ll consume some of the benefit, but not all, take a conservative approach and entering a fraction of the expected return on investment is an acceptable approach.