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Social Security: the ‘Break-even’ Debate

Our recent blog post about the merits of delaying Social Security to improve one’s retirement outlook sparked a raft of comments, pro and con.

In the example in the article, a 65-year-old who is slated to receive $12,000 a year from Social Security could, by waiting until 66 to sign up for benefits, get $12,860 a year instead. By comparison, it would cost quite a bit more – about $13,500 – to buy an equivalent, inflation-adjusted annuity in the private insurance market that pays that additional $860 a year.

The strategy of delaying Social Security “is the best deal in town,” said a retirement expert quoted in the article.

Aaron Smith, a reader, doesn’t agree. “It will take 14 years to make that ($12,000) up. Sorry but I’ll take the $12k when I’m in my early 60s and can actually enjoy it,” he said in a comment on the blog.

Smith is making what is known as the “break-even” argument, which is behind a lot of people’s decisions about when to start collecting their Social Security.

But other readers point out that the decision isn’t a simple win-loss calculation. The benefit of getting a few extra dollars in each Social Security check – between 7 and 8 percent for each year they delay – is that it would help retirees pay their bills month after month.

This is a critical consideration for people who won’t have enough income from Social Security and savings to maintain their current standard of living after they stop working – and 44 percent of workers between 50 and 59 are at risk of falling short of that goal.

One big advantage of Social Security is that it’s effectively an annuity, because it provides insurance against the risk of living a long time. So the larger check that comes with delaying also “lasts the rest of your life,” said Chuck Miller, another reader.

Last but not least, as David Gardner points out, delaying benefits is integral to married couples’ retirement planning. When the retired spouse who had the higher earnings dies – typically this is the husband – his widow begins receiving a survivor’s benefit equal to the monthly benefit he was receiving. When the husband “draws Social Security benefits early,” he leaves “a reduced survivor benefit for the wife,” Gardner said.

Arguably, people who have saved enough money to retire comfortably will do just fine if they start their benefits at age 62. “[M]aybe save and invest the money,” suggested Mike Roberts.

However, many people don’t have that luxury: about half of retirees, for example, have to rely on Social Security for half of their retirement income. They should think long and hard about the benefits of waiting.

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25 Responses to Social Security: the ‘Break-even’ Debate

  1. Ken Pidcock says:

    Delaying Social Security until 70 is equivalent to purchasing a life income annuity in the amount of the difference between your current benefit and your benefit at 70, the purchase price being what you spend down from retirement savings in order to delay. That purchase price isn’t trivial – for a middle class worker retiring before 65 it’s definitely in the six figures. But, if you look around, you’ll see that you can’t find a deal nearly as good in the insurance markets, especially if you are married and looking for a two life annuity. Of course, not everyone likes annuities. I’m reminded every day that Ken Fisher hates ‘em! In that case, you might pass on delaying, confident that, in most past scenarios, you would have done better keeping those savings invested. Only be aware of the difference between most and every.

    • Ken Pidcock says:

      I’m going to change that to “…could have done better…” If you are going to take the benefit early but also spend down your savings conservatively (e.g., the 4% rule), you’re only going to make yourself spend less; that’s not doing better. To do better by keeping the savings invested, at least early in retirement, means spending them down at an initial rate around 6%.

      • Brian says:

        Not sure I understand, “….you’re only going to make yourself spend less; that’s not doing better. To do better by keeping the savings invested, at least early in retirement, means spending them down at an initial rate around 6%.”

        Applying this concept using our real-life scenario –> My wife and I (both 64y & retired), are living off our investments; putting off claiming SS until some future date….but when? (We debate this regularly.) Just looking at the breakeven points, we’d be looking out to about 76y and 79y, respectively.

        Maintaining the same lifestyle as when we were working, we’re spending from our investments at an annual rate of between 3.15% – 3.60%. If we took the SS benefit right now, I’d be bringing in annually $27K of SS benefits, her $26K of benefits, allowing our investments to grow (certainly at a lower annual % than the 8% that SS would start growing in the future; but at a much high annual $ return due to the size of the nest egg.)

        In our case, our lifestyle spending would be the same (no need to change that), but less would come from our investments to maintain those lifestyle needs. Our investment withdrawal rate would actually drop.

        • Ken Pidcock says:

          I use this illustration. You retire at 64 due, $20K Social Security benefit. If you delay until 70, that’s $30K. If you spend (to make the illustration simple) $180K in retirement savings to get to 70, that means that, from a combination of your SS benefit and $180K retirement savings, used at different times, you draw a certain annual income of $30K from the day you retire at 64 until the day you die (or your survivor dies). To draw the same income without delaying, that $180K would have to generate $10K annually, a 5.5% initial drawdown. You probably don’t want to do that, even though history shows that you’d probably get away with it, so you’ll end up spending less early in retirement. Which is not doing better. To do better, you have to suck it up and draw down those savings aggressively.

          For me, all the break even stuff seems odd, based on an unconscious assumption that it’s important to have maximized holdings even if you’re dead. So what if I die with fewer savings than if I hadn’t delayed? My survivor has a higher Social Security benefit and I was comfortable spending more when I was alive.

  2. Dennis M Reese says:

    I was planning on taking my SS at 62, but delayed it to limit my income in order to pay much lower health insurance premiums. I have a pension, passive income and decent savings, so I don’t worry to much about outliving our funds. Previously, if I were to take SS at 62, I figured the break even point with conservatively investing my SS would be around 79-80. Also to live my current life style, if I didn’t take SS at 62, would require me to withdraw from my 401k. I use savings now to supplement my income to hopefully last till I begin taking SS at 65. Note: My FRA is 66 & 4 months.

    • Dave G. says:

      This is an interesting point for those not yet 65 and Medicare eligible. Drawing Soc. Sec. early could put you over the threshold for reduced premiums on the Obamacare Exchanges for individual (non-group) insurance. Another example why “break even” analysis can’t address every situation.

    • Brian says:

      We had a somewhat similar timeline. We enrolled in the ACA from 2014-2018 to benefit from the subsidized premiums (Silver Plans) by withdrawing from our investments in a tax efficient manner that would keep our MAGI low (below certain FPL thresholds). Drawing SS early would have certainly messed that up.

      The information from this 2013 article is what led us into the ACA: https://money.usnews.com/money/blogs/on-retirement/2013/11/11/the-obamacare-trick-early-retirees-should-know

      In our case, the discussion was more about paying $100-$200/month for ACA premiums vs $600-$700/month for retiree medical premiums (from our previous employer). In fact, in 2017 and 2018 our ACA premiums dropped as low as $85/mo and $107/mo, respectively. For us, those were significant savings. The SS breakeven point analysis didn’t even play into that discussion. Now, becoming Medicare eligible, we don’t worry as much about the MAGI issue. We still have to agree on when to claim SS.

  3. Geoffrey Hewitt says:

    So some people like myself have extreme medical problems, so I started receiving Social Security disability in my 50’s; I am now 65 years of age. One key here is the average earnings is calculated over the 30 to 35 years one works to estimate benefits. Therefore, it is paramount to fight for yearly raises above inflation because this avenue permanently increases one’s benefits. Furthermore, one needs to study finance and investing either through course selection in school or by reading. Educated investors can reap an extra $500k just by understanding finance. But today, most people would rather be on their iPhones. In fact, I have owned Apple stock for 15 years after watching human behavior with their devices.

    • Brian says:

      What I found is that when SS calculates your benefit over a 35 year work history, small additional raises don’t change the SS benefit appreciably.
      The SSA has these worksheets for various years of birth:
      For 1955, I use this: https://www.ssa.gov/pubs/EN-05-10070-1955.pdf
      For 1954, my wife uses this: https://www.ssa.gov/pubs/EN-05-10070-1954.pdf
      (If you just modify the birth year towards the end of the URL filename, you can bring up your birth year’s worksheet.)
      I put the 1955 worksheet into an Excel spreadsheet, using their calculation directions as the guide. I could then “tweak” income numbers over the various years to see what changes might have impacted my benefit. It became clear that significant pay increases made a difference, but smaller ones did not.
      It appears to be more about picking a career field that pays well. The cumulative effect of continuous high career earnings years makes a big difference in the final SS benefit.
      Certainly, applying financial and investing knowledge goes a long way to improving one’s wealth.

  4. John D Lentz says:

    Has anyone considered the loss of purchasing power for waiting 4-8 years?

  5. Tony Webb says:

    Aaron Smith is entitled to his preferences. But unless he is flat broke, those preferences shouldn’t lead him to claim early. He can delay claiming, and draw on his financial assets to fund the higher consumption he prefers early in his retirement.

    • Paul Rubinfeld says:

      At the risk of appearing to pile on that there is much wrong with Aaron Smith’s near-term focused reasoning, his expectation of having more $$’s in his early 60’s when he “…can actually enjoy it,” is flawed. If he lives to age 78, he will regret not having more money when he is likely to need it. The recreational activities he expects to enjoy pale in comparison to the costs he is likely to need to pay for after making it to age 78.

  6. Jennifer Lee says:

    My job was eliminated and I worked for an Episcopal Church as Assistant to the Rector. He needed more of a CPA person and I was not that, I worked in Administration. I was 63 and two months when my last day arrived on Nov 30, 2017. I got only two months of severance and two months of Healthcare and it was near Christmas. I could not collect unemployment because Churches do not pay the taxes. This added insult to injury to say the least. I was worked as an nurse RN prior to moving on to Church work which I had hoped would be the end of my career. After several months of searching I could not find a full-time job with benefits due to my age. I was hired by an Oral Surgeon for three days per week, no benefits and I had to pay for my own insurance. I had NO CHOICE but to take my Social Security early. I got my first check when I was 63.5 years of age. I did not want to deplete any of my savings which was doing well. I had no pension, just a 401K and IRA that I started myself. I will now be 65 in September and I have had to be careful how much money I make so I do not go over the Social Security income limit which is unfair for seniors who lose their jobs from 62 to full retirement age which for me will be 2020. I have a larger SS check than the average because I made a decent income in my working life, but not enough to live on alone in a high cost city on the east coast where I live. I am divorced and had to take what benefits I had earned early. Thank God for the fact that I could use it to get me through this time until Jan of 2020 when I can safely make more income and will be full retirement age. Not everyone gets to wait until they are 70 as was my original plan. Congress needs to make a severe penalty with age discrimination. Everyone hired in my old job had no CPA background and left within a few months of being hired. Now there are two people in that position doing what I did alone. All after me were in their twenties.

    • Ellis says:

      Ms. Lee, you are absolutely correct about age discrimination — I’ve seen several people have their working life ended early because of it.

      One thing you may wish to consider after you reach full retirement age is that not only can you earn more income without penalty, but that you can voluntarily suspend your Social Security benefit for whatever time you choose. Should you be fortunate to earn a substantial income, each year of suspended benefits would get you an increase of approximately 8% per year or about 2/3% a month.

      Also, be aware that there are Social Security benefits available to divorced spouses and divorced surviving spouses who were married at least 10 years. It does not matter if your ex-spouse has remarried, and he will not know if you receive benefits.

  7. Donna says:

    There isn’t one correct answer for everone. I am waiting until I’m 70 because if I live a long life, I may really need that money. I don’t care if I reach the break even point. I’ll be dead and it won’t matter. If you need the money earlier than take it. None of us knows how long we will live. I’m betting on longevity.

  8. Monty says:

    In my situation, I took Social Security at age 63½, and therefore drawing less from my retirement savings, My break even point is at age 86, assuming the markets cooperate. Taking less from your investments mitigates the sequence-of-portfolio bad returns that might occur early in retirement.

    Sequence-of-returns risk involves the actual order in which investment returns occur. Typically, negative returns earlier in retirement have a more severe impact on your portfolio than negative returns later in retirement. That’s because your portfolio’s value is reduced by both negative market performance and any withdrawals you take to fund your day-to-day expenses. This means that a smaller amount is left behind to experience any potential future growth.

    • Ken Pidcock says:

      Sequence of returns risk is important to consider and relevant to this discussion. If you attempt to delay a Social Security benefit with distributions from a volatile portfolio, you could end up in trouble with the size of those distributions. We’re delaying one of our benefits but using a period certain annuity for that very reason.

  9. Cindy in South says:

    I really don’t know what to do. I have a state pension. I already know what I will get at the different ages of retirement. If I retire at 60, I will get $1,000 a month in state retirement. If I retire at 62, I will receive $1,200 a month in state retirement. If I retire at 65, I will receive $1,500 a month in state retirement. If I retire at 67 (my full retirement age, I am currently 59 1/2 yrs old) I will receive $1,652 a month in state retirement. I will receive $1,000 a month in Social Security, if I retire at 62. That would make me at $2,200 a month counting my state retirement. I would have to COBRA my state insurance and that is almost $500 a month COBRA costs. It is now only $60 a month. So, I would clear only $1,700 a month at age 62 after paying for insurance. I currently net $3,000 a month from my job. I would keep working until 65 or 67, until I was able to get Medicare at 65, and also draw more in Social Security and state retirement, BUT, my job is 60 plus hours (I am salaried) a week and very stressful. I just don’t know if I can last until 65. I don’t want to dip into my meager savings ($200,000) either to make up to $3,000, what I currently make. If I quit at 62, I am $1,300 short of what I currently bring home each month. Of course, if I keep working, I may end up dead from the stress…I guess I will try to last until I am 65, but I would really like to go home at 62. I have no debt and my house is paid for. I don’t really know if I can take $200,000 and make it last the rest of my life to make up the difference if I retire at 62. Do y’all have any suggestions for how to make the $200,000 last?

    • Cindy – thank you for your question.

      I have written a couple blogs that might help with your retirement decision.

      The first blog is about an easy-to-use calculator. Just enter your $200,000 and how much you’d like to withdraw from that money every year and the calculator will give you the probability of how long that nest egg will last- the article explains this more clearly, and I recommend you read it. Here’s the link: https://bit.ly/2HWpw8H
      And here’s the link to the calculator: https://vgi.vg/1taUb0A

      Second, I wrote a blog about how much the typical older worker has saved for retirement – and how much income that savings will produce safely every month. Here’s the blog: https://bit.ly/2ZFFVT2

      I hope these help!
      Sincerely, Kim (blog writer)

  10. Kenneth says:

    The debate about Social Security is a huge one. My opinion is neutral.

    • Brian says:

      Agreed. Some changes that Congress is considering have huge implications for SS recipients.

      One plan being proposed would raise the limit for non-SS income before benefits begin to be taxed. The new limits would go to $50,000 for individuals and $100,000 for couples, up from the current $25,000 and $32,000 thresholds.

      Another plan (part of the Secure Act), which passed the House of Representatives in May and awaits action in the Senate, would increase the age for RMDs to 72 from 70½. (Of importance to those who have high IRA balances and impacts (delays) the provisional income calculation for taxing SS benefits.)

      So, where they may be neutral opinions, there is certainly the potential for significant changes in the works for SS coming soon.

  11. Jay says:

    Where else, other than delaying your Social Security benefit, can you get a guaranteed 8% no-risk return, with potential increased cost of living bumps? If you need the money, take it early. If you are in poor health and don’t expect to live in to live past 82 or so, take it early. If you have sufficient savings, use your cash bucket to in effect purchase a total protected annuity.

  12. Laura paige says:

    This is a great debate about Social Security.

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