Q & A
Calculating the “break-even point” on early Social Security sign-up–how do you factor in the probabilities?
Full Question: I am continually concerned that you and others keep telling people who are eligible for Social Security to delay taking the benefits. Here is how I figure it. I take my Social Security benefit at $1,230 a month. At the end of the year I have received $14,760 in income. I continue to get $1,230 a month (adjusted for inflation).
My friend who could get the same benefit delays taking it. At the end of the year he has zero. He now gets 8 percent more each month or about $1,328. That’s nice, but at the end of year two I have collected a total of $29,520 and he has collected $15,936.
The “cross over” point for total benefits— where he, in total, receives more than me— does not occur for nearly 13 years!
This does not take into account that I might have invested all or part of the first year’s benefit. Or that I might not live 13 years. Or that Social Security as a program may not exist by then.
Bottom line, I say take the benefit and use it while you can. Please let me know if you see a fallacy in this plan.
Answer: I understand your concern about the break-even time (It’s actually 12.5 years), but the answer is a matter of probabilities, not how we feel about whether it will be a good deal or not. And whether you make the bet depends very much on your income, sex, race and other circumstances. Those factors have a big influence on life expectancy.
Let me give you some examples based on United States Life Tables from the National Vital Statistics Reports:
• If you lump together the entire population, we collectively have a life expectancy of 17.8 years at age 66. This means 50 percent of the entire group between age 66 and 67 will live at least another 17.8 years. Yet the break-even in real purchasing power is 12 years. That makes deferral a pretty good bet.
• The life expectancy for 66-year-old white males is 16.4 years, so deferral is still a good deal for them. Black men, on the other hand, have a life expectancy of only 14.5 years. The odds are still favorable, but it would not be a totally foolish decision to take the other side of the bet.
• For white women the same figure is 19.0 years, so deferral is better for them. Black women have a life expectancy of 17.9 years. Other considerations can be major. Social Security actuaries, for instance, have found that men in the top half of the Social Security wage scale now have life expectancies 5.4 years longer than men in the bottom half. So, if you earn an above average income, you can nudge your life expectancy up from the broad figures.
Another factor is how much more money may mean to you in the future compared to what it will mean to you today. Here we find that most people want to eat dessert first. They’ll say, “I’d rather have more money this year than a bit more money for the rest of my life. I know I can enjoy spending the money today. I don’t know if I’ll have the capacity to enjoy spending the money 12 years from now when I am 78.”
That’s a question you’ll have to answer for yourself.
Source: Scott Burns, StatesmanJournal.com – January 25, 2014
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