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Calculating total lifetime benefits based on Starting age, Interest rate AND INFLATION?


Calculating total lifetime benefits based on Starting age, Interest rate AND INFLATION?

What is the difference between Interest and Inflation in calculating future value?


If you invest $100 for 1 year at 4% return, it is worth $104 after that year (not counting inflation). 

If you put $100 under your mattress for a year at 7% inflation, it is worth $93 after that year. 

If you invest $100 for 1 year at 4% return and 7% inflation, will it be worth $97 or $96.62?


If inflation is just a negative interest rate, (+4) + (-7) = -3% effective "compounding" rate. 

100% - 3% = 97% = 0.97

$100 * 0.97 = $97. 


If you calculate interest first and then inflation, you get a slightly different number:

$100 * 1.04 = $104;  $104 * 0.93 = $96.72


With the numbers the Social Security Admin give me for retiring at 62 - 70 years of age, the break even point at which later starting dates catch up to the age 62 scenario can be calculated given an interest rate. At an interest rate > 3.7%, ages 63 and up never catch up. At 2% interest, age 66 catches up at age 82.2. Age 63 catches up at age 82.8.  


When you defer payment for later years, you are getting paid in smaller, inflated dollars. 

From 2012 through 2021, the average S&P 500 index returned 14.8% annually.  Stocks in general appreciated +10% per year on average over the last century. 


It seems prudent to get every dollar you can away from the government ASAP and invest it with people who know how to make money rather than squander it. 


Is it better to get paid at 62 or 82?

Trusted Contributor

I believe calculate interest first and then reduce for inflation is the correct method.  The reason is the  principal and the compounded interest are real money values and the inflation reduction is an unrealized loss.  A bank account would show multiple years of compounded interest value but then you would apply the compounded inflation to the bank total to determine the true present value in the account.

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Bronze Conversationalist

@BrianB441502 You raise a valid point regarding the "when do I start social security?" question. In many cases, the decision is needs based. However, for folks that are savvy with investments and have a reasonable understanding of life expectancy, there is an advantage to starting your SS benefit early especially if you have stopped working. 

The SSA informs us that the decision to start early, at Full Retirement Age (FRA), or delay to age 70 are actuarial equivalents. This is based on average life expectancy and a discount rate of approximately 3%.  To understand this you need to understand present value calculations as well as life expectancy statistics. You appear to be knowledgeable about using a discount rate (i.e., interest rate, etc.). Many folks may use a discount rate equal to 0% when they are reviewing the decision when to start SS benefits and they do not consider the loss of SS benefits if they elect to delay. There is a time value of money that folks need to consider over one's life expectancy. I would not use a discount rate based on the S & P 500 last 10 years. However, 20 years or longer would be appropriate. You will find the Compound Annual Growth Rate (CAGR) to be in the 6% to 7% range. There are calculators on the internet that will develop CAGR with or without inflation and reinvested dividends for any periods you select (i.e.,, etc.). Lastly, I am including a link to an Actuarial Life Table found on the SS website If you look at males ages 62, 66, and 70, you will see an average life expectancy between ages 83 to 84. That does not mean all males die at that point in time. It is an average which I believe is based on empirical data from SS records. The statistics that jumps out is that about 49% to 50% of males are deceased by age 80; about 64% are deceased by age 85; about 81% are deceased by age 90; and about 94% are deceased by age 95. Almost 2/3 of males do not attain the average life expectancy (ages 83 to 84). Females tend to live longer. About 50% of females attain average life expectancy So, if you are not risk adverse, you may be able to outperform the SS benefit calculations by starting early and investing in the S & P 500 rather than the SS program. 

Social Butterfly

Your point about taking SS retirement benefits as early as possible, at age 62 rather than one's full retirement age (FRA) or even delaying until up to 70 (the oldest age at which you can receive a higher benefit for the delay), and investing the funds until an older age at which you might begin drawing from them is one that I had considered a number of years ago. And it is a pertinent consideration. And it's really a different scenario from collecting benefits at 62 and using them for living expenses as a number of claimants do.


But there is the "insurance" aspect of Social Security as well and this might need to be considered in some cases. A single person might not care about benefits for any survivors, if there even are any. But someone with a spouse will have additional considerations, particularly if the spouse will be dependent on survivor's benefits for living expenses. And certainly if there are children of school/college age who may also get survivor's benefits.


For myself, I pondered this for several years, and crunched a lot of numbers. Then I decided to delay my SS benefit until age 70. This was for the sole purpose of providing an increase in benefits for my wife (due to the "DRCs"), assuming that she will outlive me. This was especially important due to our age difference, she's 11 years younger than me and so the number of years she might be expected to live after my own death is all the more greater.

Periodic Contributor

I did the same analysis and decided I would need to get about 3% on the banked early SS benefits to break even as compared to taking SS later. Also with my wife's low SS she will get additional spousal amounts to equal half my earnings so that is another incremental advantage to waiting. It's hard to find 8% guaranteed return after inflation but waiting till 70 looks like it provides exactly that. 

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