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Mark Miller: Remaking Retirement

When Are You 'Money Ahead' on Social Security?

Your "break-even age" is just one factor to consider when deciding when to claim, says contributor Mark Miller.

Andy Landis worked in the Social Security Administration's field offices for 12 years, helping people figure out when and how to file for their retirement benefits. He is more familiar than most with how people weigh the pros and cons of a key choice--whether to start benefits as early as possible or get a higher payment down the road by delaying their claims.

"I would run through all the numbers with people on the additional benefits they could receive by waiting," he said. "At the end of it, the response would be: 'Thank you very much--now just give me my money. I don't know how long I'll live.'"

Landis is a top expert on Social Security, and his experience underscores something any expert in behavioral economics can tell you: Given the choice between receiving a benefit now or later, most people prefer sooner, even if receiving the benefit later would be more valuable. Indeed, in 2016, 56% of men claimed before their full retirement age, as did 62% of women, according to the Social Security Administration.

Many Social Security claimants who consider delaying want to analyze what they regard to be a key number: their break-even age, or the age when total lifetime benefits received would be equal to using a different claiming age. Taking benefits early works out to your advantage if you don't live to the break-even age. You also come out ahead if you delay benefits and then live beyond the break-even point. The losing scenario is delaying benefits and dying before reaching the break-even age.

I consider break-even analysis to be the wrong way to look at Social Security claiming decisions, in most cases. No one knows for certain how long they will live--although if you're in poor health as retirement approaches, an early benefit election probably makes sense.

More important are the protections Social Security provides against longevity risk--the risk of exhausting resources before the end of life. Even relatively affluent retirees can exhaust their savings when they live to very advanced ages--especially women, who tend to outlive men. For a widow in her 90s who has exhausted her savings, a maximized Social Security benefit with inflation protection is highly valuable.

The SSA has been criticized for failing to emphasize this point. A 2016 U.S. Government Accountability Office report found problems and inconsistencies in the advice it gives to claimants. The overriding message of the report was that the SSA needs to be more proactive about informing claimants that Social Security benefits can be a hedge against longevity risk.

The SSA subsequently updated a number of policies and training procedures aimed at moving claims specialists away from break-even analysis.

Still, you're probably thinking: "Thank you very much. Now please just give me my break-even point." OK, let's run the numbers. But first, a quick refresher on how retirement benefits are calculated.

To determine your benefit amount, the SSA takes into account your 35 years of highest wages and translates this into something called the primary insurance amount. If you wait until the full retirement age of 66, you would receive 100% of the primary insurance amount. If you start at 62 (the earliest opportunity), you will receive a reduced benefit for the rest of your life--25% lower. By waiting until after full retirement age (66), you would get the delayed retirement credit, which is 8% for each 12-month period that you delay. The credits are available until age 70.

So, what are the break-even numbers? Landis analyzes this with slightly different terminology--what he calls "money ahead." That is, the age at which a particular claiming strategy pays off.

Landis explains this in simple terms in the 2018 edition of his book, Social Security: The Inside Story. He uses simple dollars and excludes inflation, since Social Security benefits come with an annual cost-of-living adjustment. He also excludes taxation of benefits, any additional income from working longer, and any possible return on invested Social Security benefits. He assumes a full retirement age of 66 in all cases.

If you file at age 62, your money-ahead age is 78. That is, you will be ahead until 78, when another person waiting until full retirement age (66) catches up with you. From that point onward, that person is ahead for the rest of his or her life.

If you file at 66, your money-ahead year is 82 1/2. After that age, someone who waits until age 70 to file is ahead, permanently.

How much further ahead depends on life expectancy. The SSA offers a longevity calculator based on the mortality data it tracks; you can view this data in table form here. For a somewhat more personalized approach, check out the longevity illustrator created by the American Academy of Actuaries and the Society of Actuaries. This calculator considers your age, gender, whether you smoke, and your own assessment of your general health. The resulting numbers show a range of possibilities.

The numbers will look better for married couples who pursue coordinated strategies. In most cases, the higher wage earner (typically men) delay their filing as long as possible; the surviving spouse steps up to a survivor benefit, equal to 100% of the deceased spouse's benefit.

"A coordinated strategy increases the odds for couples, because one of the two will beat the break-even figure," says Steve Vernon, an actuary and research scholar at the Stanford Center on Longevity. To see how this can work, try a couples-oriented Social Security calculator. (Steve also has an excellent new book that deals with these topics, Retirement Game-Changers: Strategies for a Healthy, Financially Secure, and Fulfilling Long Life, scheduled for publication in July.)

Morningstar columnist Mark Miller is a nationally recognized expert on trends in retirement and aging. He also contributes to Reuters, WealthManagement.com, and The New York Times. His book, Jolt: Stories of Trauma and Transformation, will be published in February by Post Hill Press. The views expressed in this article do not necessarily reflect the views of Morningstar.com.