Minimizing the Risk of Opportunity Loss in the Social Security Claiming Decision

Abstract

The optimal age to claim Social Security benefits is often defined as that which maximizes expected lifetime benefits. Expectations are not always met however, and this optimal claim age is unlikely to be that which would have maximized lifetime benefits received by the eventual age at death. The optimal claim age then carries the potential for an opportunity loss, or the risk of receiving less than the maximum possible, which varies with age at death. This study evaluates the claiming decision by first computing and presenting the maximizing claim age for each possible death age over the retirement horizon, and then determining the actual opportunity loss for each death age for claiming at the otherwise optimal claim age. The potential for opportunity loss over the retirement horizon is then computed for the optimal claim age. If a participant can target a period within the retirement horizon for which the values total lifetime benefits higher than the remainder, the optimal claim age for that target period will entail less risk, or less potential for opportunity loss, than that for optimizing over the entire retirement horizon. Such a strategy could effectively address gaps in a retirement income portfolio.