Q & A
Ask Rusty – Doing a Breakeven Analysis
Dear Rusty: I’m in a bit of quandary trying to decide whether I should take my Social Security now at 62, or wait until some later time, like maybe when I’m 66. I know that I’ll get less money by taking it now, but I also know that my check will be bigger if I wait longer. I’m in pretty good health and don’t really need the money right now, but I’m just unclear about whether it’s best to wait, or just take the money and run. Signed: Wondering
Dear Wondering: You’re asking, of course, one of the most common questions we receive – Should I collect now, or wait until later? Social Security is designed so that, at least theoretically, you get the same amount of money either way. If you claim early your checks are smaller but you get more of them; if you claim later, your checks are bigger but you don’t get as many. Again, that is theoretically. In reality, whether or not it is to your financial advantage to wait to apply for benefits depends nearly entirely on your health and expected longevity. Of course, no one knows how long they will live, but if you examine your health, your living habits and your family history, you can make an educated guess at whether you’ll meet the current average longevity, which for men and women today is their early to mid-eighties.
To help with your decision, you may benefit from doing a breakeven analysis, which shows what your total received Social Security income would be in a couple of different scenarios. You can easily look to see how long you would have to live to collect the same amount of money if you claimed at, say, age 66 compared to what you would collect if you didn’t wait and instead started benefits at age 62. It goes like this:
Get a Statement of Benefits from Social Security (you can do this online) which shows your estimated benefit at age 62, at your full retirement age (e.g., 66) and also at age 70. Using those numbers, first add up the total amount you would collect between ages 62 and your full retirement age by multiplying your monthly age 62 benefit times the number of months until your full retirement age (48 months in this example). Now subtract your age 62 monthly benefit amount from your full retirement age monthly benefit; use the product of that subtraction and divide it into the number from the previous calculation (the total you would collect between 62 and 66). The result will be the number of months from your full retirement age you would have to collect in order to get the same total amount of money as if you claimed at age 62. In the simple example I just used, you would need to collect about 12 years beyond your full retirement age, or to age 78, before you have collected the same amount of money as if you claimed at age 62. You can do the same exercise using age 66 vs. age 70 and you’ll find that you breakeven at about age 81. If you live beyond your breakeven age, you’ll collect more in total benefits by waiting.
These numbers may vary slightly depending upon what your true full retirement age is and what your actual estimated benefits are, but this will give you a pretty close idea of when you would break even financially. Yes, it’s a roll of the dice because no one knows how long they will actually live, and your current financial needs and health must always be part of the equation, but doing a breakeven analysis can be an important exercise to help you decide.
The information presented in this article is intended for general information purposes only. The opinions and interpretations expressed are the viewpoints of the AMAC Foundation’s Social Security Advisory staff, trained and accredited under the National Social Security Advisors program of the National Social Security Association, LLC (NSSA). NSSA, the AMAC Foundation, and the Foundation’s Social Security Advisors are not affiliated with or endorsed by the United States Government, the Social Security Administration, or any other state government. Furthermore, the AMAC Foundation and its staff do not provide legal or accounting services. The Foundation welcomes questions from readers regarding Social Security issues. To submit a request, contact the Foundation at ssadvisor@amacfoundation.org, or visit the Foundation’s website at www.amacfoundation.org.
I’m 67 and still working and retiring at age 70. my question is can my wife take some of my retiring amount due to the economy until i take full retirement
Carlos,
Your wife cannot collect a spousal benefit from you unless you are already collecting your own Social Security retirement benefit. If you plan to wait until you are 70 years old to claim your maximum Social Security benefit, your wife can, if she is eligible, claim a spousal benefit from you at that time.
Russell Gloor
National Social Security Advisor
The AMAC Foundation
Digging further with regard to inflation, the money you receive retiring before age 70 will not have the effect of inflation and can even be invested to push off that breakeven point even later. That has not been considered in your linear calculation of breakeven. If the breakeven point can be shifted even a year, that could easily impact one’s choice. Another item not considered is taxes. If you begin receiving your benefits prior to retiring, it will be taxed at a higher rate than after age 70. This is a strong negative incentive for retiring early, but it is not in the calculation. The future inflation rate and tax structure are unknown, but could be based on the current situation to make the calculation defined. Is there an online calculator that takes these factors into consideration to get a more accurate number than your breakeven method?
Jim,
You are correct that the article does a linear calculation of breakeven, and that consideration of inflation, present value of money, taxes, and even collecting benefits early and investing have not been considered in the breakeven analysis article. These are factors which can only be evaluated by a skilled and certified financial planner, using whatever tools someone with those qualifications may have available to them. Here at the AMAC Foundation we are not certified financial planners and are not permitted to offer advice outside the specific boundaries of Social Security. Which is why the article limits the analysis to the differences in Social Security benefits by claiming at various ages. For the most part, that is the information sought by those who send us questions. I’m not personally familiar with any tool which does a complete financial analysis such as you suggest, but often recommend that those who wish to do so contact a certified financial planner. Space limitations in published articles sometimes restrict the narrative presented.
Russell Gloor
National Social Security Advisor
The AMAC Foundation
Do social security benefits get a cost of living increase each year? If so, how much and wouldn’t that affect FRA vs age 70 decision?
Yes, Cost of Living Adjustments (COLA) are applied each year in December, if inflation as measured by the Consumer Price Index so warrants. Since COLA is applied to your “Primary Insurance Amount” (PIA) even if you’re not yet collecting benefits, you still benefit from all past COLA increases while waiting to apply. So, if you delay claiming SS until age 70, you won’t lose out on those previous COLA increases given before your claim.
Russell Gloor
National Social Security Advisor
The AMAC Foundation