To Delay or Not to Delay? The Social Security Break-Even Point Explained
The question of when to take Social Security has been called “the single most important retirement money decision of your life.” So it makes sense that it would be weighing on the minds of many soon-to-be retirees. Should I take it early at 62? How about my full retirement age of 66? Or maybe 70, when my benefits are maxed out?
And when that question is brought to the table, what inevitably follows is a discussion of the “break-even” point, a mystical age out there in the unknown future. The problem is, sometimes the explanation is just as elusive as the number itself.
Most people don’t even know what the break-even point is, let alone how it affects when they should start receiving benefits! This is why I am here to clarify.
The Big Trade-Off
But before I go into my explanation, you need to know that the decision of when to take Social Security is always a trade-off. This is probably why it’s so hard to make! For example, if you claim at 66 (rather than 70), you receive checks for those four extra years, but your benefit is smaller. If you delay claiming benefits to 70, you forfeit those 4 years of benefits, but your monthly Social Security Check is much larger.
So what’s the break-even point? In short, it is the age (month and year) when delaying benefits starts to pay off. It is the point in your life when the larger checks begin to catch up (in dollar amount) with the head start you would’ve gotten had you begun at age 66.
But that’s a little too abstract. Let’s get concrete.
A Running Analogy
Imagine two track runners, all decked out in the short shorts and sports watches, hanging out at the starting line. Let’s call them Jack and Will.
Now Jack, he’s a really on-top-of-it type of guy, eager and prepared. He is poised at the start line, ready to go. When the gun goes off, he takes off, determined and well paced.
Will, on the other hand, is a little bit lazier. When the gun goes off, he waits. He takes time to stretch, yawn, maybe take a few more sips of his Gatorade. And after Jack completes 4 laps, he takes off. He’s way behind, but he’s going 32% faster than Jack. Did I mention that Will is a world-class athlete?
At first, it looks like Jack is going to win hands down. But after each lap, Will gains on him. Lap 5 and 6? Will’s chances still look bleak. 6 and 8? Still no chance. But by the time Will completes his 11th and 12th lap, victory is within his grasp. Will grits his teeth. Closer. Closer. He’s breathing down his neck!
And then, with a burst of adrenaline and determination, Will finally surpasses Jack in lap 13.
The break-even point. The brief moment Jack and Will were side by side is the break-even point.
Now let’s bring it back to Social Security.
Claiming earlier (let’s say at 66) is being like Jack. When the gun of full retirement age sounds, you take off. But your check is smaller. You’re making money at a slower pace.
Now claiming later, that is just like Will. You take off 4 laps too late, but your check is larger. You’re making money 32% faster (8% for every year past full retirement age).
Eventually the monetary benefits of claiming late will surpass the benefits of claiming early.
But that doesn’t mean that claiming later is always the better bet.
For instance, what if you pass away before you reach your break-even point? Or, keeping with the running metaphor, what if Jack and Will’s race was only 9-laps? In that case, Will wouldn’t have had enough time to catch up.
This is why Social Security advisors consider your life expectancy. If your life expectancy is beyond your break-even point, it may be a good idea to delay. But if not, it may not be.
However, the biggest point about the break-even point is this: It is not the sole determinant in the “to delay or not delay” question. Marital status, availability of resources and many other considerations greatly affect the decision. The truth is that a lot of factors come into play when running the race of Social Security planning. What you really need is a trusted advisor who can coach you through “the single most important retirement money decision of your life”.
Need a Certified Financial Planner to help you make the right decisions about Social Security? Call Seniormark at 937-492-8800 for a free consultation.