Academic journal article Journal of Economics and Economic Education Research

The Impact of Different Ages and Race on the Social Security Early Retirement Decision for Married Couples

Academic journal article Journal of Economics and Economic Education Research

The Impact of Different Ages and Race on the Social Security Early Retirement Decision for Married Couples

Article excerpt

INTRODUCTION

The purpose of this study is to examine the impact of age differences on the social security early and delayed retirement decision for married couples. This paper extends the analysis of Docking, Fortin and Michelson (2013) to couples of different ages. This analysis is done for married couples by race. More specifically, we analyze the 9 married couple combinations for the following races: Whites (W), Hispanics (H) and Blacks (B). The nine husband/wife combinations are: WW, BB, HH, WB, BW, WH, HW, BH and HB. We develop an Excel model to compute the breakeven IRR for each of the 9 race combinations. Following Blanchett (2013), three claiming scenarios are considered: receiving benefits early (e.g., at age 62 versus 66), the maximum realistic delay period (e.g., at age 62 versus 70), and delaying benefits past full retirement age (e.g., age 66 versus 70). Within these 3 claiming scenarios we examine couples by race combination who retire at the same age with age differences of 0, 4, 7 and 10 years. We assume the working husband (male) is older than the non-working wife (female). We also examine a scenario where the couples retire at different ages with positive age differentials of 4, 7 and 10 years.

Individuals born between 1946 and 1954 can retire with full social security benefits at their full retirement age (FRA) of 66. The FRA gradually rises until it reaches 67 for people born in 1960 or later. However, individuals have the option to retire earlier or later than their FRA. The earliest one can retire is age 62, and the latest is age 70. Early retirement is attractive for many reasons: social security benefits (SSB) and rules can change, health concerns, and increased demand for leisure. However, SSB are permanently reduced by an actuarial reduction factor (5/9 of 1% for the first 36 months and 5/12 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.

The results of previous research into the social security early and delayed retirement decision for married couples have been mixed. This paper extends the analysis of these prior studies to examine the role that race and age differences between spouses have on their retirement decisions. We will create a spreadsheet to model various retirement scenarios that will be beneficial for individual investors and their advisors.

LITERATURE REVIEW

There has been an extensive number of studies on the early versus delayed social security retirement decision for married couples although none have explicitly addressed the age difference issue across race categories as this study does. For a review of prior literature, see Docking, Fortin and Michelson (2012, 2013).

Only a few studies have looked at the age difference between the spouses in determining the optimal retirement age. Code, Diamond, Gruber and Jousten (2002) find that if the husband is older than the wife, then he should delay retirement to age 65; but if the wife is 5 years older than her husband, he should retire early at age 62. Munnell and Soto (2007) show that as the age fdifference between the spouses (husband minus wife) increase, the wife should claim earlier (age 62) and the husband should claim later (age 69). Sun and Webb (2009) show that if the wife is 3 or more years older than her husband, he should retire at 69 and she at 66. Tucker (2009) says both should retire at age 62 no matter the age difference. McCormack and Perdue (2006) assume the husband is 7 years older than his wife and the husband has the higher earnings. They conclude that both should retire at age 62.

Docking, Fortin and Michelson (2013) look at the impact of race on the retirement decision for married couples of the same age. They compute a breakeven (BE) internal rate of return (IRR) for each of nine race combinations from age 62 through age 70. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.