Calculating SS break even point

[Lsbcal]

I was thinking about taking SS a bit earlier and have heard the break even point (where you start really getting more for delaying) is about age 82 or so.

The tables for benefits are here: Full Retirement Age = 66

Then I thought maybe I could do a simple calculation to check this out for myself. Here is the calculation comparing taking SS at 64 versus 65 assuming full retirement age 66 benefit is 27,300:

1) Benefits are from the SS table above:
Age 64 = 0.867 * 27300 = 23669
Age 65 = 0.933 * 27300 = 25470

2) Delaying for 1 year versus taking now, solve for x in:
23669 * x = 25470 * (x - 1)
x = 14.1 years

3) Investment returns with that extra age 64 year's money:
Now a minor consideration about investing the SS we get in year 64. Assume it goes into a pot after paying 25% taxes (marginal rate) and that we are taking 4% out of the pot for living. Then we invest that left over pot and achieve maybe a 4% real return. That real return might be controversial, but I'm guessing here a 2% real bond return and a 6% real stock return at 50/50 allocation. This number is going to turn out kind of small anyway so this assumption is not a biggie. The extra investment gain then becomes:
gain = ((0.75 * 23669) (1 + .04)^14.1 ) - 23669 = 7192
So the investment gain just translates into about another 0.2 years before breakeven.

The final result is: break even = 14.1 + 0.2 = 14.3 years or age 78.

Does this look roughly like it makes sense?

 

[rescueme]

Personally, I never thought of any such calculation, regardless of the idea of "I need to get mine".

Money is for the living, not the dead. Additionally (being married), there are different optons on how you need to approach the question (if you wish).

To take SS at any age involves a lot of questions. Are you single/married? Do you have enough income to delay SS (till any age)? Do you have enough retirement assets/income to delay SS?

Again, I don't have a need, nor desire to measure what I'm "owed" under the program. As the old statement says, "it is, what it is"...

I doubt very much that you will be worrying about what you "lost", assuming you believe in the afterlife...

Just my $.02.

 

[W2R]

The SS website says here,

When To Start Receiving Retirement Benefits

If you live to the average life expectancy for someone your age, you will receive about the same amount in lifetime benefits no matter whether you choose to start receiving benefits at age 62, full retirement age, age 70 or any age in between.

They put a lot of money and effort into their life expectancy numbers, which are available on their website if you search for them. I was too lazy to look any further but I have seen them there before.

Because of all their actuarial work, I think the break-even point is not as important for me to determine as is the answer to this question: Am I likely to live longer than or die earlier than most others born when I was?

 

[MichaelB]

Because of all their actuarial work, I think the break-even point is not as important for me to determine as is the answer to this question: Am I likely to live longer than or die earlier than most others born when I was?

This is a key point. If you don't really need the SS earlier, delaying until you're 68 or so helps reduce the risk of outliving your portfolio or running out of money.

 

[haha]

Because of all their actuarial work, I think the break-even point is not as important for me to determine as is the answer to this question: Am I likely to live longer than or die earlier than most others born when I was?

Before the horses even leave the gate, the female horses have a big bonus in that SS does not use sex in its actuarial work. Unlike any private insurance company, which knows that giving a woman an annuity on the same basis as a man is a loser.

So, women have even more reason to delay than a single man. Of course this whole thing has been turned on its head with recent political-economic strains. Maybe every one should take it and run today.

Ha

 

[RunningBum]

This is a key point. If you don't really need the SS earlier, delaying until you're 68 or so helps reduce the risk of outliving your portfolio or running out of money.

That's another key point. I like to look at what happens on both sides of the breakeven point if I make the wrong choice for that side.

If I die early and haven't been taking SS, I'm leaving less for my heirs. However, I'll certainly have left the bulk of my estate because I haven't been drawing down my other retirement funds for as many years. I don't see a big downside to this.

If I live a lot longer than anticipated but started taking SS as early as possible, I'm facing a declining nest egg, and a smaller payout from SS. My quality of living may go down, and/or I may become a burden to my heirs. This is a pretty big deal to me.

I find the second situation more important to avoid than the first. I also have some longevity in my family, and take care of myself, so I think it's reasonably likely I'll live past the breakeven point. If your family history isn't good, taking SS early is probably the way to go.

The other factor is "getting yours now" in case benefits are cut later. I don't know how to predict that, and how that moves the breakeven point. If you think they will stop, obviously your play is to take it as soon as you can. I kind of doubt the reward will be that clear cut.

 

[W2R]

Before the horses even leave the gate, the female horses have a big bonus in that SS does not use sex in its actuarial work. Unlike any private insurance company, which knows that giving a woman an annuity on the same basis as a man is a loser.

So, women have even more reason to delay than a single man. Of course this whole thing has been turned on its head with recent political-economic strains. Maybe every one should take it and run today.

Ha

Yes, due to the political aspects it is tempting to apply for SS now and, as you put it, 'take it and run today". I am seriously thinking of applying next year, even though I am only 63. If the political situation doesn't mess things up, then the onslaught of a bazillion baby boomers making their claims for SS could slow down their paperwork to finalize the SS payment, as it apparently has for federal retirement payments (I just barely missed that slowdown).

But then at other times, I remember my familial longevity and want to wait until 66 or even 70. Decisions, decisions.

 

[youbet]

Does this look roughly like it makes sense?

It makes perfect sense as an answer to the question you are asking: At what age will I have received the same number of nominal dollars if I start SS at 64 vs 65?

It does not however give any consideration to other important factors, many of which have already been mentioned, such as:

1. The time value of money. A dollar received today is likely to be more valuable than a dollar received next year.

2. The risk you are trying to mitigate. Do you want longevity protection? Do you need more cash flow today? Do you have a spouse you want to protect? Are you or your spouse impacted by GPO or WEP? Etc.

3. Does your family and medical history give you any clues regarding your life expectancy?

4. What is your forecast for the economy and the investment climate. That is, if you start SS early and that results in you having extra dollars to invest, will the results of that investment be good?

5. What will your personal rate of inflation be vs the govt's CPI and AWI indexes?

The list goes on and on. So, yes, you can calculate a breakeven point in nominal dollars easily enough. I'm just not sure that that number is all that useful by itself.

In my own case, my chosen risk mitigation is to provide protection for DW should I predecease her. She'll get essentially zero SS due to WEP and cannot collect on my SS due to GPO. Therefore I started SS at 62 in order to preserve FIRE portfolio value (spend SS instead of portfolio withdrawals) for her.

Edit: I do note that you made an attempt at including investment gain. But, since you used only a one year delay in starting SS (64 vs 65), there was no compounding involved. If the delay was longer, say from 62 to 70, I think compounding of investment gains would be significant.

You also made an aggressive income tax assumption. The tax hit on early SS dollars for many would be less. In fact, if the SS replaced dollars you otherwise would have withdrawn from a TIRA (fully taxable as ordinary income), starting SS early would actually reduce your fed income taxes since SS is taxed at a lower rate than ordinary income.

 

[youbet]

This is a key point. If you don't really need the SS earlier, delaying until you're 68 or so helps reduce the risk of outliving your portfolio or running out of money.

Could be true, but depends on individual circumstances, what happens to the early SS dollars within your investment choices and how the higher portfolio withdrawals brought about by delaying SS impact your FIRE portfolio. It could turn out that the period between 62 and 70 was a bad time for portfolio withdrawls.

At age 70, would it be better to have a smaller portfolio but larger SS check (delay SS) or a larger portfolio and smaller SS check (early SS)? Who knows? It's all such a crap shoot laden with assumptions you have to make.

Having said that, I'll agree with you the average American is probably better off delaying SS if longevity protection is the goal because the average American might fail to make prudent decisions with the inflowing SS money over the delay period. And even if he/she did make good decisions, other factors in the economy or political scene might still make a delay more beneficial for longevity protection.

I think we're all going to have to meet in a decade and compare notes on how everything worked out.

 

[youbet]

If I live a lot longer than anticipated but started taking SS as early as possible, I'm facing a declining nest egg, and a smaller payout from SS. My quality of living may go down, and/or I may become a burden to my heirs. This is a pretty big deal to me.

.

That could happen. But consider that for the years between 62 and 70 your FIRE portfolio will experience a lower level of withdrawals and presumably will be significantly larger at 70 than if you delay SS. The "declining nest egg" you mention is actually exaccerbated by delaying SS, at least until you're 70.

I think, given that you prudently manage your early SS dollars, that the main benefit to longevity protection provided by delaying SS is that of reducing the need for portfolio management. A larger SS check (delay SS) will likely mean a smaller portfolio to manage (you've been taking larger withdrawals). And the larger SS check is easy for a geezer to manage. The folks at "the home" receive it and cash it to help pay your bills...... Fewer issues about who's calling shots on your portfolio to pay the bills.

 

[Nords]

I was thinking about taking SS a bit earlier and have heard the break even point (where you start really getting more for delaying) is about age 82 or so.
The final result is: break even = 14.1 + 0.2 = 14.3 years or age 78.
Does this look roughly like it makes sense?

Scott Burns and other journalists have written a lot of articles around the age 77-78 range.

The question is what to do with the knowledge. If you think you're going to make it to that age then you'd want to hold off. If you think your genes or your lifestyle are going to have you checking out earlier, then you'd want to grab SS as soon as you're eligible.

There are other non-financial issues. If the extra income makes you sleep easier at night then you'd grab it as early as you could. If you have a surviving spouse who'd be able to get more benefits on your record (vice theirs) then you'd want to hold off until age 70.

Bud Hebeler has more thoughts on the issue:
Articles

 

[Brett_Cameron]

That could happen. But consider that for the years between 62 and 70 your FIRE portfolio will experience a lower level of withdrawals and presumably will be significantly larger at 70 than if you delay SS. The "declining nest egg" you mention is actually exacerbated by delaying SS, at least until you're 70.

I think, given that you prudently manage your early SS dollars, that the main benefit to longevity protection provided by delaying SS is that of reducing the need for portfolio management. A larger SS check (delay SS) will likely mean a smaller portfolio to manage (you've been taking larger withdrawals). And the larger SS check is easy for a geezer to manage. The folks at "the home" receive it and cash it to help pay your bills...... Fewer issues about who's calling shots on your portfolio to pay the bills.

I modeled this for our situation, laying out an income plan through age 86. I modeled taking SS at 62, FRA and 70 years of age.

Looking at SS alone breakeven for taking SS at FRA instead of age 62 is age 75. Delaying SS until age 77 instead of 62 has a breakeven at age 77. This is similar to what a friend of mine was told. He is currently age 77 and started SS at age 62. He was told by the SS agent when he applied that his breakeven would be age 77. I asked him would he have delayed had he known he would live so long and he did not answer, just told me his reason for starting early (breakeven at 77 and uncertainty of longevity).

My plan right now has me starting SS at 62 to maintain my portfolio to provide for post age 86 for me and for continued retirement for my much younger wife. Starting SS early results in my portfolio being twice as large at age 86 than if I delay to age 70.

Of course this is just an academic exercise because my assumptions have a100% probability of not matching future reality.

 

[SecondCor521]

Last I checked (which was several years ago, but I don't think things have changed in this regard), after you go through all the calculations to determine what your full SS is at your particular FRA, the deduction for taking it early or the addition for taking it late is a simple linear function. And the deduction for taking it early is greater than the addition for taking it later. So it's something like 0.9% less per month earlier than FRA and 0.4% more per month later than FRA.

I cannot fathom (and I fathom pretty well, thankyouverymuch) how a bi-modal linear model is based on extensive actuarial work by the SSA. Sounds like more a government SWAG after political and budgetary input were taken into account.

2Cor521

 

[chinaco]

DW and I plan to do the split 62/70 approach.... assuming SS remains as it currently is in the future. That will give us some benefit early and mitigate the longevity risk of the survivor... which will probably be my wife (if family history is any indication of longevity).

But!!! We will make decisions based on information available at the time. Tax changes could make many of us decide to approach it differently... depending on one's other assets.

 

[Lsbcal]

Thanks very much for all the replies so far and feel free to keep them coming. I'll look at some links mentioned. I have considered some of the other influences on taking SS early but it's always good to hear from others in case one has left some idea out. This stuff can get a bit complicated -- like life .

Nobody seems to have seriously questioned my equation in item #2 so I'll assume it's roughly correct. Was rather pleased with my algebraic brilliance (joke). It is one of the few SS take-it-early/late points where I can write down an equation versus answer a puzzle (like: when will I die?).

One comment on the tax situation. Most probably know about SS being taxed up to 85%. That is, as you add in more income more SS gets taxed at the marginal rate until the 85% figure is hit. That means basically that one can go up pretty rapidly in marginal tax rates then actually as you add in more income the marginal tax rates decrease. So I've been planning on blending the income sources (1) IRA withdrawal that is taxed, (2) SS that gets partially taxed, (3) Roth that does not get taxed at all. It's pretty easy to just create a table of this using TurboTax. Again, this is something I can at least do that is maybe (probably?) going to be roughly right for a few (one?) years into the future -- you see I'm very confident on this point.

Regarding longevity insurance, our plan B is to sell the big house which at 80 might become quite a chore. I might start forgetting which place I stored stuff as there are a lot of cubbies around here. Selling the big house would probably bring in a lot of cash assuming California real estate doesn't go completely belly up.

P.S. I keep reading about wealthy famous people dieing before their 80's. I know it might be all that artery clogging eating and maybe snorting all that coke. But still I wonder, even with a very healthy lifestyle, will I really make it to my 80's?

 

[eytonxav]

4. What is your forecast for the economy and the investment climate. That is, if you start SS early and that results in you having extra dollars to invest, will the results of that investment be good?

If economic reality in the future turns out to be as unpleasant as 2008, I suspect such an economy will dramatically affect my health and longevity

 

[foxfirev5]

I've followed the postings regarding this issue for quite some time. All I know is that the people I've been associated with over the years have peaked in activities and expenses long before an age of 65. Some have expressed a concern about being left in a welfare facility to spend your final days.
For the majority of the people on this forum I doubt this is a real issue. Most have adequate assets to insure a decent final retirement if required. While the facility takes your last dollar your not thrown out on the strret. Coming from a family of declining decendants I see this on a regular basis. However I certainly am not expecting any kind of legacy or inheritance. I believe that we each should make our own way.
From that perspective I will be taking SS at 62 regradless of any breakeven point. What I've made of myself with insavings and investments will be the difference, for better or worse. Regards,

 

[jdw_fire]

I modeled this for our situation, laying out an income plan through age 86. I modeled taking SS at 62, FRA and 70 years of age.

...

My plan right now has me starting SS at 62 to maintain my portfolio to provide for post age 86 for me and for continued retirement for my much younger wife. Starting SS early results in my portfolio being twice as large at age 86 than if I delay to age 70.

Of course this is just an academic exercise because my assumptions have a100% probability of not matching future reality.

your plan flys in the face of alot of advice (and analysis) for situations involving married people where the larger wage earner is older than the spouse. longevity insurance for the "poorer" spouse has real value.

btw what rate of return are you assuming for your portfolio? it has to be high considering that SS is increased about a real 7.3% per year (compounded anually for the 8 years) if you wait til age 70 to start taking it. a 7.3% real "return" looks really good at the moment.

 

[braumeister]

For me, the big factor was looking at my ancestors.
On my father's side, typical lives for most have been in the 75-85 range.
On my mother's side, most typically make it into the 87-96 range.

Since I have always been in good health, and take good care of myself, I think it's quite reasonable to expect to make it to my 90s, so there has never been any thought of taking SS before the max at age 70.

 

[Lsbcal]

...(snip)...
btw what rate of return are you assuming for your portfolio? it has to be high considering that SS is increased about a real 7.3% per year (compounded anually for the 8 years) if you wait til age 70 to start taking it. a 7.3% real "return" looks really good at the moment.

Good point as this is another way of looking at the numbers. One has one's own portfolio to draw from while letting the SS get bigger or one can freeze the payout for the SS "portfolio" and withdraw from both portfolio's.

For my analysis above the payout went up by 0.933/0.867 = 1.076 or 7.6% (real return). So the SS portfolio real return for next year will be 7.6% for sure. Now all I'd need to know is what our stock/bond portfolio will do next year. Will it be up a lot making up for the recent down market or a continuation of the current miserable market situation?

 

[Chuckanut]

Of course, the break even point changes depending upon the assumptions that one makes, but I have read several articles that have advised people who think they will live past 80 to delay SS until full retirement age. Thus, your calculation seems to be in the ball park.

 

[Chuckanut]

In my case, I must take my pension early because that is the only way to get the medical insurance I will need from retirment to Medicae eligibility. Because of that, I have decided to hold off on SS until I am at least 66 and perhaps beyond that if my pot of money holds out. This assumes my health stays good. The future is unknowable, so a delayed and higher SS payment will counter an earlier and reduced pension payment. Also, SS has no COLA cap which could prove another great advantage in the future. My pension has a partial COLA, up to 3% a year.

 

[clifp]

My original plan was to take SS at 62. Then depending on my health at age 69 probably pay back the SS and refile for a higher benefit. Of course that option is no longer available. FYI, HaHa I suspect is one of the last 100 or so people in the country to get away with that neat little trick.

My new plan is wait until I am 60 (8 years) and see what the new laws look at that point and not worry about it then.

 

[obgyn65]

This is also the approach I am using. I am 46 now, and quite a few things may change by the time I reach 62.

My new plan is wait until I am 60 (8 years) and see what the new laws look at that point and not worry about it then.

 

[Brett_Cameron]

your plan flys in the face of alot of advice (and analysis) for situations involving married people where the larger wage earner is older than the spouse. longevity insurance for the "poorer" spouse has real value.

btw what rate of return are you assuming for your portfolio? it has to be high considering that SS is increased about a real 7.3% per year (compounded anually for the 8 years) if you wait til age 70 to start taking it. a 7.3% real "return" looks really good at the moment.

I assume 3% inflation and 2.9% return above inflation. Maybe too high. I will re-run the numbers for varying rates of return. Thanks!