Academic journal article Journal of Economics and Economic Education Research

The Influence of Gender and Race on the Social Security Early Retirement Decision for Single Individuals

Academic journal article Journal of Economics and Economic Education Research

The Influence of Gender and Race on the Social Security Early Retirement Decision for Single Individuals

Article excerpt

INTRODUCTION

The United States Census Bureau considers a baby boomer to be an individual born between 1946 and 1964 (http://www.census.gov/population/www/socdemo/age/generalage.html#bb). Those born in 1946 will reach full retirement age (FRA) in 2012, while those born in 1964 must wait until 2031 to retire with full social security benefits. Boomers have the option to retire earlier or later than their FRA. Early retirement is attractive for many reasons: social security benefits (SSB) and rules can change, health concerns, and increased demand for leisure, to name a few. However, SSB are permanently reduced by an actuarial reduction factor (5/9ths of 1% for the first 36 months and 5/12ths of 1% per month thereafter for early retirement). Delayed retirement is attractive because SSB are increased by a delayed retirement credit (DRC) of 8% for each year of delay after FRA up to age 70.

There has been an extensive amount of research into the social security early and delayed retirement decision for single individuals. The results have been mixed. This paper will extend the analysis of prior research to the early and delayed retirement decision for the baby boom generation now at or rapidly approaching retirement. We will analyze the decision for single individuals by gender and by race. We will create a spreadsheet to model this and other early retirement scenarios that will be beneficial for individual investors and their advisors.

LITERATURE REVIEW

Many prior studies have looked at the optimal age for a person to retire[See Rose and Larimore(2001), Cook, Jennings and Reichenstein (2002), Muksian (2004), Kinderman and Jennings (2006), Spitzer (2006), Munnell and Soto (2007), Cunningham and Erickson (2009), Tucker (2009), Sun and Web (2009) and Ryan (2010)]. Depending upon the methodology chosen, the assumptions made, and the life expectancies tables used, the optimum retirement age for men and women has ranged from 62 to 70. These studies find the retirement age that maximizes the PV of future SSB over some life expectancy.

The simplest studies assume one discount rate (DR), no taxes, no cost of living adjustments (COLA), no dependents, no other earnings such that SSB are not subject to the Earnings Test (ET), and no other income such that no SSB are taxed. Among these studies, Rose and Larimore (2001) find 62 to be the optimal retirement age for both men and women; while Munnell and Soto (2007) find the optimal age to be 62 for men and 68 for women. Kinderman and Jennings (2006) find that the desired retirement age increases as cost of living adjustments increase and discount rates decrease. Sun and Webb (2009) find the preferred retirement age to be 62 or 69 for men and 67 or 70 for women depending on their risk aversion. As complexities are added to these PV analysis studies, such as different discount rates, tax considerations, COLA assumptions, and taxability of SSB, other retirement ages become optimal.

Another group of studies looks at finding an internal rate of return (IRR) between various retirement ages [See McCormack and Perdue (2006) and Friedman and Phillips (2008)].

Both of these are simple studies assuming no taxes, no cost of living adjustments, no dependents, no other earnings such that SSB are not subject to the Earnings Test, and no other income such that no SSB are taxed. The advantage of the IRR studies over the PV studies is that the optimum retirement age is not subject to the whims of the discount rate choice.

McCormack and Perdue (2006) find the optimal retirement age to be 66 for both white males and females. In their IRR calculation, they assume SSB are received monthly and the retirement decision is made annually. However, a shortcoming of their study is that they assume the median life expectancies at age 62 (as provided by the U.S. Life Tables) remain constant; when, in fact, the U.S. Life Tables show that life expectancy changes as one ages (See Table 1). …

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