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It was a mystery. I’d spent the morning sifting through results from the two leading Social Security calculators. I was running my eye down the column of numbers generated by the 2nd well-respected calculator. They summed to more than $700K in lifetime benefits. That seemed reasonable enough.

But wait, it was only half what the other calculator reported! How could they be so different? I had entered our data carefully. I’d triple-checked the tables of our earnings histories. So why were the two calculators so far apart on our lifetime benefits?

To compound matters, when it came to monthly benefits, the situation was the opposite. One calculator was higher in lifetime benefits, the other was higher in monthly benefits. It was a mystery I’d have to solve….

Our national retirement program, and the financial planning required to use it effectively, are complex. There are several critical variables. And you only need to get one wrong to completely skew the results. Getting them all right requires deep knowledge, superhuman judgement, and probably some luck. It’s an impossible task. And yet, because we all need answers about retirement, we keep trying….

The Calculators

I’m using the word “calculator” here as a shorthand for tools that attempt to optimize your Social Security benefits. The Social Security Administration (SSA) offers simple, free benefit calculators on its site, and there are others available across the web. But those just tell you what you ought to get, monthly, depending on when you claim. They don’t go beyond that to compute when you should claim, to maximize benefits. In addition to estimating those benefits, two commercial calculators will optimize your Social Security claiming strategy so you get the most to which you are entitled….

Maximize My Social Security is offered by Economic Security Planning, Inc. a firm presided over by Laurence Kotlikoff, professor of Economics at Boston University, researcher, and author of several personal finance books. Kotlikoff has applied his economics background to create a new flavor of financial planning with the focus on optimizing your living standard. Social Security Solutions is led in part by William Reichenstein, a professor in Investment Management at Baylor University, and researcher in the areas of investments and taxation. His early work on estimating the value of Social Security retirement benefits was particularly helpful to my own retirement planning.

Both companies have just finished updating their algorithms to incorporate new rules from the Bipartisan Budget Act of 2015, specifically the phase-out of the file-and-suspend and restricted application strategies that I covered in my last post. Both calculators appear to reflect the latest rules in their computations now. However, you will still find discussion of the old strategies scattered throughout their documentation and help. And some aspects of the law are awaiting clarification in new regulations. So there could be corrections to the calculations going forward. I wouldn’t make any final decisions based on the results just yet, without seeking a second opinion.

Signing up for these calculators won’t bust your budget. The costs are modest, especially given that total lifetime Social Security benefits for a working couple can easily reach $1 million. The mid-range Social Security Solutions (SSS) Plus offering is $49.95 for a year of online access. That includes the ability to re-run the program to compare scenarios. For $124.95 you can purchase the same, plus a session with an expert. For $249.95 you can get all of that, plus assistance with filing. Maximize My Social Security (MMSS) costs just $40 for an annual household license. You can pay an additional $150 for a personal review of your report with an expert.

Input

The most important input for a Social Security calculation is your earnings history. To find that data, look under “Taxed Social Security Earnings” on your most recent Social Security statement. For a typical working couple this could be 35 to 40 years of data each — 70 to 80 numbers total that must be keyed in correctly for accurate results.

MMSS has the best options for entering past earnings. You can type them in manually, infer them based on your estimated monthly retirement benefit at full retirement age from the SSA, or import them directly from the Social Security website, using cut and paste. This latter feature worked well, thankfully saving me 10-15 minutes of tedious data entry.

With SSS, entering your earnings history is more labor-intensive. And you cannot edit or update your values later. I was told if you need to do that, the company has to “reset the account,” and you start over. So, it’s a good thing I checked my numbers carefully! MMSS, on the other hand, does let you edit your earnings history, but you can’t change marital status or birthdates after initial entry, without deleting all your data first.

MMSS has easy and powerful options for modeling future or post-retirement income. You can enter detailed projected future earnings by year, or you can select a row in your past earnings, and grow earnings from that year forward using an entered growth rate. SSS however seems to have more limited capabilities for modeling future or post-retirement income. There are fixed entry fields for ages 60 through 66 in the Analysis Settings, but it’s unclear how to use them, or how to enter income received outside of those ages.

Usability

MMSS has a friendly and efficient user interface. You navigate input sections using a logical list. There are nice touches like interactive tables for entering annual earnings, and an explicit “Save” button — reassuring when you’ve been laboring over data entry in a web browser. I also appreciated the clear restatement of Inputs at the end of the results report — essential for checking your input data. And the MMSS web site says “we will be rolling out a new user experience,” so we can hope the interface will only get better.

But MMSS lags in a couple of areas: scenario management (discussed below), and calculation speed. The program requires at least several minutes to calculate your results, and “may take 10 minutes or more.” That’s surprising in today’s computational world, where sophisticated scientific simulations can be done in the blink of an eye. The program says it’s analyzing thousands of possible Social Security claiming scenarios. Sounds good, in theory, but I suspect it could have used a simple deterministic calculation to bypass many of those scenarios.

The SSS user interface is more visually appealing at first glance, but can be confusing and inconsistent to use. The program seems to have added features haphazardly. Critical functions like editing and reviewing your income history are unavailable or hidden in obscure places. Sometimes multiple terms are bandied about for the same concepts: “Primary Strategy/Recommended Solution”, “Total/Lifetime Benefit.” On the other hand, SSS performs its calculations instantaneously, so there is no waiting on your results. And its scenario management is notably powerful and flexible….

Scenarios

An essential reason for using a sophisticated Social Security or retirement calculator is to analyze and compare scenarios: What happens if you die early? What happens if your spouse lives to 100? For this article, I used the calculators to analyze three scenarios: (1) the optimal strategy using the old file-and-suspend/restricted application rules, (2) the optimal strategy after the new rules obsoleting those strategies, and (3) a split claiming strategy where my wife takes benefits at age 62, while I wait as long as possible, until age 70. (I’ll write more about that last scenario, and my own preferred claiming strategy, in a future post.)

MMSS offers a limited capability for analyzing scenarios. You can model one at a time, using its single “What-If Scenario” feature. But not being able to create and manage multiple scenarios at once is a notable shortcoming. A workaround is to create one scenario initially, calculate and download the report to save those results, then return to edit the scenario and calculate again. But this is error-prone and, given MMSS’s lengthy calculation times, could get tedious if you want to compare many scenarios.

SSS offers more generalized scenario management, using its “Strategy List” feature. You can create, edit, calculate, and compare many different Social Security claiming strategies. For each scenario, you can vary the age when you and your spouse take your benefits. The program computes all scenarios at once, and then you can compare the results. The comparison page is compact and useful. Unfortunately scenarios aren’t included in the SSS download report: You must be logged into the web site to review them.

Economic Conditions

Retirement planning requires making a number of economic assumptions to generate results, and Social Security planning is no exception. Each of these Social Security calculators requires two more important inputs: the assumed rate of return on investments, and the inflation rate. Subtracting the latter from the former gives the real rate of return. That single variable has an enormous impact on any long-term financial simulation. And here’s the truth: Nobody knows what it will be!

By default, MMSS assumes a 5% nominal rate of return and a 3% inflation rate, for a 2% real rate of return. The documentation notes that these default values match “roughly what Treasury Inflation Protected Security (Treasury inflation indexed bonds) are currently yielding.” The online help urges, “By assuming a realistic, low, safe real rate of return (like 2 percent) you let the program make an apples-to-apples comparison between one safe investment, namely waiting to collect higher Social Security benefits, and another safe investment, collecting early and investing safely on your own.” In other words, you don’t want to distort your situation by assuming outsize returns from aggressive investing. I did bump the nominal rate of return up to 6% for my analysis, based on how I’ve seen my conservative portfolio behave over many years.

SSS is more conservative, to an extreme. In its Analysis Settings, it defaults to 0% discount and inflation rates. This essentially ignores the time value of money. SSS argues this is justified because “the after-tax real rate of return on Treasury Inflation Protection Securities (TIPS) is essentially zero.” Though, as I’m writing this, TreasuryDirect is showing the latest 30-year TIP yielding a little over 1%, and my tax rate has been very low so far in retirement.

Both calculators allow editing their economic defaults, though their documentation seems to argue against it. In my opinion, even conservatively-invested retirees are likely to do better than the TIPS rate. MMSS agrees: “Neglecting to discount and simply adding up undiscounted dollar amounts is the same as assuming you can’t earn a return on investing, which is clearly not the case.”

Results

Both of these sophisticated software tools attempts to get you the most out of your Social Security benefits. But what does that mean, exactly? There are two important goals here: getting the most lifetime income if you don’t live very long, and getting monthly income protection if you should live a very long time. The question is whether you optimize for more income in the near future, or more in the long-term. If you die early, the first option pays off, if you live long, the second one does.

SSS states that “Your recommended strategy was created to balance [these] two equally important yet separate goals…” However, it doesn’t explain how this trade-off is optimized. It appears to simply choose maximum lifetime income for your entered life expectancy. And that’s what MMSS does, stating that it will “determine the filing strategy that maximizes the present value of your lifetime benefits.”

Both programs allow you to change your projected maximum age, so you can analyze the payoffs under different scenarios. Unless you anticipate a reduced life expectancy, most of us are advised to plan for a ripe old age. Protecting against longevity risk by maximizing monthly income seems more important than maximizing lifetime income if you die early. Because, the downside of not getting quite so much if you die in your 60’s pales next to the downside of running out of money in your 90s!

So how did my scenarios turn out? Both programs generate extensive PDF reports of their calculations with detailed results and discussion. Before the new rules, both calculators recommended a file-and-suspend/restricted application strategy: My wife would file and suspend in her late 60’s, and I would file a restricted application for spousal benefits at the same time. Then we would each claim our own benefits at age 70. After the new rules, both calculators recommended that we each simply wait until age 70 to claim: No paperwork shenanigans in our late 60’s.

So, were the new Social Security rules a major financial hit for us? Hardly. The advantages that both calculators claimed for their complex strategies were really more due to claiming later than to somehow claiming smarter. The actual value of the complex, soon-to-be-abolished strategies is less than 2% of total lifetime benefits in our case. Over our full lifetimes, MMSS reports we’ll give up about $14K, while SSS reports we are losing about $18K. Sure, that’s good money as a lump sum, but spread out over a 40-year retirement, we aren’t going to miss it. Your situation might be different though. The loss from the new rules could reportedly reach $50K-$67K for a high-income, dual-earner couple.

Solving the Mystery

The two calculators made sense individually, and agreed on overall strategy, but were markedly different in their numerical results. Monthly benefits were off by about 15%, while lifetime benefits were off by a full factor of 2. The mystery remained. But the clues were right before my eyes.…

Let’s start with that monthly Social Security benefit. You’d hope this would be a straightforward calculation, specified by government rules. But, unfortunately, there is room for interpretation:

SSS is most conservative, and easiest to understand: it doesn’t assume any earnings for future years, nor inflate or grow your current earnings.

On your annual Social Security statement, the government is more optimistic: it projects your income into the future “at your current earnings rate.” So it assumes you’ll keep working, though it apparently doesn’t inflate or grow your earnings.

MMSS is also optimistic, in a different way: “Our tool … uses the Social Security Trustees’ assumptions about future real wage growth and future inflation.” So MMSS grows your expected benefits automatically, whereas the others do not. And that’s why the monthly benefits computed by the two calculators differ significantly.

What about lifetime benefits? Why were they so different?

Recall the dramatically different default assumptions for economic conditions: MMSS assumes 2% real returns by default (3% in my case), while SSS assumes a draconian 0% real return. Those small percentages have a big impact over the long run.

My calculations confirm that the discrepancy in lifetime benefits is due to these differences in assumed real returns. When compounded over 30 and 40-year retirements, investment returns of a few percent can amount to staggering sums. Mystery solved.

Choosing a Calculator

I’ve used both Maximize My Social Security and Social Security Solutions extensively. I don’t have a favorite. Each program comes from a respected name in the financial planning business. Each has its pros and cons. MMSS has a friendlier user interface, in general. But the calculations are slow, and you only get one scenario. SSS offers multiple scenarios, and fast calculations, but the user interface can feel disorganized and dated.

If you are serious about optimizing your Social Security claiming strategy, you might want to use and compare both programs, as I did. Or, if you’re a die-hard do-it-yourselfer with a healthy nest egg and a simple financial life, you might skip all the fancy analysis and simply claim your Social Security at age 70. Either way, for most of us, Social Security is likely to remain a little mysterious!

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Note: My friend and colleague Mike Piper has updated his concise Social Security book for the new law and it’s available now: Social Security Made Simple: Social Security Retirement Benefits and Related Planning Topics Explained in 100 Pages or Less. Act now to get one of the best books on Social Security!

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