We can’t control what others do and we can’t stop misfortune from striking. But we can control our own actions. Those who are financially prudent will most likely enjoy success, even if events don’t always go their way.
I was looking at various articles on starting Social Security benefits – a topic of great confusion. The following is an excerpt from one such article. It caught my attention because I think it is wrong. There are different reasons for delaying SS, breaking even is not one of them.
The so-called breakeven point is totally irrelevant. Take the benefit when you need the money the most. Or, as I did, once you reach full retirement age start your benefit and invest it until needed as income.
What is my break-even point?
Although the promise of bigger monthly checks might make delaying retirement seem like the best choice, it’s important to realize that waiting to receive bigger benefits also means receiving fewer payments over the course of your life. Accordingly, it’s important to find the age at which the cumulative amount of money you may receive if you file later equals the cumulative amount of money you may receive if you file early. This is your break-even point, or the point at which it “pays off” to wait.
For example, a person entitled to $1,500 per month at age 67 may only receive $1,050 per month if they retire at age 62. Waiting until age 67 means missing out on five years of those $1,050-per-month payments, or $63,000, but it also means gaining an extra $450 a month for life. So, how long would it take in order to come out ahead financially? Dividing $63,000 by that $450 indicates that the answer is 140 months past age 67 – meaning age 78.7 is the age at which the total number of dollars you receive if you retire at age 67 begins to exceed the total number of dollars you’ll receive if you retire at 62.
JR and Roscoe have it right – if your financials allow for a choice.
Obviously, if you need the money to cover everyday expenses, that’s a good reason to commence when first eligible.
However, if you are in a position to make a choice, two options to consider are:
Maximizing the guaranteed, inflation-adjusted, monthly income where needed, along with any other pension or annuity income, to cover everyday expenses, or
Maximize the value of all benefits (pension, retirement savings, Social Security, Medicare), NET AFTER TAXES/PREMIUMS.
Too often, folks talk in gross dollar amounts, not net, net, after taxes and IRMAA, etc.
people hate the thought of leaving any money on the table, as if it were “their money.” The break-even point is interesting analytically but when it fits your personal circumstances is more appropriate.
I agree with Richard. While it’s good to know the figures – it’s not as “important” as emphasized in the citation. It’s not like this is the “lease v buy” decision with an automobile. It will take much longer to know with SS if you made the “right” decision.
The other “break even” is receiving in benefits what you paid in taxes. That usually occurs within seven years or less. The goal is to be actuarial loss.
The dollars they are paying me are worth less (much less) than the dollars I paid, so they are giving me more of them.
“The calculations assume that the retiree worked from 22 until retiring at 65. The tax totals listed here are higher than the retirees actually paid. Why? The Urban Institute statisticians adjusted the value of the taxes to reflect inflation — so a dollar paid in Social Security taxes in, say, in 1980 is adjusted upward as if the worker had paid it in current dollars…”(Politifact)……………………….Assuming…The recipient lives the average lifespan, he might not even receive as much as he paid in.*………………………..
“For an average-wage-earning, two-income couple turning 65 in 2010, the pay-in, pay-out ratio for Social Security by itself will actually be slightly negative —- the couple will have paid $600,000 in lifetime Social Security taxes and will receive only $579,000 in lifetime Social Security benefits. (Remember, the couple didn’t literally pay out $600,000; that’s the current value of what they paid out over the years, plus an additional 2 percent they may have gotten had it been invested.)”(Politifact)
The breakeven age convinced me that delaying SS was the right choice for me. Maximizing the total joint (spouse) lifetime income was the most important factor to me. Taking it early and investing the income is a nice thought, but it rarely happens. If you and your spouse are still alive at 67, it’s almost a certainty at least one of you will live way past 78. If not, who cares? Of course, this strategy is dependent upon not needing the SS while you’re delaying.
it makes perfect sense for anyone who does not need the funds immediately to try to maximize the amount he gets from SS. This can involve calculating the breakeven point and your projection of whether you expect to live longer. This is what I did and I suspect many other people did as well. Why would you not want to maximize the lifetime income if it is not immediately needed? If you had a choice of $100 per month for two years or nothing in year one and $250 per month in year two, wouldn’t you choose the second option?
Maximizing your monthly income makes sense, but working about breaking even and maximizing your lifetime SS benefits doesn’t. Needless to say there is a risk delaying so grabbing it while you can makes sense too.
I began to collect at my FRA in 2008 while still working as did my wife and we invested it all in Muni bond funds for several years. Today those funds have a substantial balance and generate monthly tax-free interest which exceeds the difference in my SS between FRA and age 70.
I tend to agree with you about the break even point being irreverent but I believe you are overlooking the ability to use delayed Social Security benefits as a way to create a “secure/guaranteed” income for life for you or your spouse. As people are living longer these days, the concern of running out of money in retirement becomes more real. For people like me who have only a small pension and are looking for a steady income that will cover my living expenses in retirement, the additional SS benefits from delaying is the best annuity a person can get. It has a COLA and 100% joint survivorship. Also, there are advantages to social security dollars such as no state taxes where I live and only 85% is federally taxed. Another benefit is that by delaying SS until 70 leaves more room at lower tax rates to do Roth conversions in your early retirement years if you are so inclined . It is my opinion that if you can afford it, delaying your SS benefit for the highest wage earner is a real plus.
I’ve heard the break even discussion for years probably since the 1980s. It doesn’t have much to do with real life but for someone who’s afraid of missing out on money by taking later it gives them something to go on.
Well, it’s complicated 🙂 I once opined about delaying until age 70 on a forum and was trolled by a guy who had minor children, so he claimed benefits at age 62. OK, probably a good idea for him, but not for a single guy like myself. We all do that what is in our best interests
I confess that I was a break even/ total SS payout spread sheet geek and ran many different scenarios. Alas, I’m no Dave Ramsey racking up decades of +12% investment returns, so I elected to defer to age 70. (+12% Whiz kids would be better off to take SS at 62 and invest in equities- IF- they actually invest the proceeds)
But yeah, I agree that taking the money when it’s needed is the biggest factor in most “when should I file?” decisions.
Delaying SS did allow me to do a few more Roth Conversions, but I think I’ll still get snarled in the IRMMA tax trap. But that’s life and as a former boss used to quip “taxes aren’t a problem as long as you ear at a faster rate than the government can take it away.”
QUINNSCOMMENTARY 
JR and Roscoe have it right – if your financials allow for a choice.
Obviously, if you need the money to cover everyday expenses, that’s a good reason to commence when first eligible.
However, if you are in a position to make a choice, two options to consider are:
Maximizing the guaranteed, inflation-adjusted, monthly income where needed, along with any other pension or annuity income, to cover everyday expenses, or
Maximize the value of all benefits (pension, retirement savings, Social Security, Medicare), NET AFTER TAXES/PREMIUMS.
Too often, folks talk in gross dollar amounts, not net, net, after taxes and IRMAA, etc.
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people hate the thought of leaving any money on the table, as if it were “their money.” The break-even point is interesting analytically but when it fits your personal circumstances is more appropriate.
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I agree with Richard. While it’s good to know the figures – it’s not as “important” as emphasized in the citation. It’s not like this is the “lease v buy” decision with an automobile. It will take much longer to know with SS if you made the “right” decision.
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The other “break even” is receiving in benefits what you paid in taxes. That usually occurs within seven years or less. The goal is to be actuarial loss.
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Adjusted for inflation?
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Adjust what for inflation? You paid taxes with old dollars and your benefits adjust on too if that. Am i missing something?
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The dollars they are paying me are worth less (much less) than the dollars I paid, so they are giving me more of them.
“The calculations assume that the retiree worked from 22 until retiring at 65. The tax totals listed here are higher than the retirees actually paid. Why? The Urban Institute statisticians adjusted the value of the taxes to reflect inflation — so a dollar paid in Social Security taxes in, say, in 1980 is adjusted upward as if the worker had paid it in current dollars…”(Politifact)……………………….Assuming…The recipient lives the average lifespan, he might not even receive as much as he paid in.*………………………..
“For an average-wage-earning, two-income couple turning 65 in 2010, the pay-in, pay-out ratio for Social Security by itself will actually be slightly negative —- the couple will have paid $600,000 in lifetime Social Security taxes and will receive only $579,000 in lifetime Social Security benefits. (Remember, the couple didn’t literally pay out $600,000; that’s the current value of what they paid out over the years, plus an additional 2 percent they may have gotten had it been invested.)”(Politifact)
*adjusted for inflation.
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The breakeven age convinced me that delaying SS was the right choice for me. Maximizing the total joint (spouse) lifetime income was the most important factor to me. Taking it early and investing the income is a nice thought, but it rarely happens. If you and your spouse are still alive at 67, it’s almost a certainty at least one of you will live way past 78. If not, who cares? Of course, this strategy is dependent upon not needing the SS while you’re delaying.
LikeLike
it makes perfect sense for anyone who does not need the funds immediately to try to maximize the amount he gets from SS. This can involve calculating the breakeven point and your projection of whether you expect to live longer. This is what I did and I suspect many other people did as well. Why would you not want to maximize the lifetime income if it is not immediately needed? If you had a choice of $100 per month for two years or nothing in year one and $250 per month in year two, wouldn’t you choose the second option?
LikeLike
Maximizing your monthly income makes sense, but working about breaking even and maximizing your lifetime SS benefits doesn’t. Needless to say there is a risk delaying so grabbing it while you can makes sense too.
I began to collect at my FRA in 2008 while still working as did my wife and we invested it all in Muni bond funds for several years. Today those funds have a substantial balance and generate monthly tax-free interest which exceeds the difference in my SS between FRA and age 70.
LikeLike
I tend to agree with you about the break even point being irreverent but I believe you are overlooking the ability to use delayed Social Security benefits as a way to create a “secure/guaranteed” income for life for you or your spouse. As people are living longer these days, the concern of running out of money in retirement becomes more real.
For people like me who have only a small pension and are looking for a steady income that will cover my living expenses in retirement, the additional SS benefits from delaying is the best annuity a person can get. It has a COLA and 100% joint survivorship. Also, there are advantages to social security dollars such as no state taxes where I live and only 85% is federally taxed.
Another benefit is that by delaying SS until 70 leaves more room at lower tax rates to do Roth conversions in your early retirement years if you are so inclined .
It is my opinion that if you can afford it, delaying your SS benefit for the highest wage earner is a real plus.
LikeLike
I’ve heard the break even discussion for years probably since the 1980s. It doesn’t have much to do with real life but for someone who’s afraid of missing out on money by taking later it gives them something to go on.
LikeLike
Well, it’s complicated 🙂 I once opined about delaying until age 70 on a forum and was trolled by a guy who had minor children, so he claimed benefits at age 62. OK, probably a good idea for him, but not for a single guy like myself. We all do that what is in our best interests
I confess that I was a break even/ total SS payout spread sheet geek and ran many different scenarios. Alas, I’m no Dave Ramsey racking up decades of +12% investment returns, so I elected to defer to age 70. (+12% Whiz kids would be better off to take SS at 62 and invest in equities- IF- they actually invest the proceeds)
But yeah, I agree that taking the money when it’s needed is the biggest factor in most “when should I file?” decisions.
Delaying SS did allow me to do a few more Roth Conversions, but I think I’ll still get snarled in the IRMMA tax trap. But that’s life and as a former boss used to quip “taxes aren’t a problem as long as you ear at a faster rate than the government can take it away.”
A tongue in cheek remark if I ever heard one. Ha!
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