Break Even Analysis

Q: I have decided to begin my social security benefits at my full retirement age of 66. My birthday is in September, and since social security instructs you to file 4 months prior to that, I did so recently, choosing September as the month to receive my first payment.

A representative from the Social Security Office called and asked if I instead didn't want to start my payments in June instead of September. That it would be a difference of $39 month, meaning by the time I receive my first payment in October I would have already collected $9,172, which would take 19 year and 4 months to make up.

Is there any reason not to do this besides the loss of $39/month after 19 years?

I am divorced and spousal benefits do not apply.

A: I don't recommend using breakeven analysis for the reasons outlined in my answer to the question, “Should I Use Break-Even analysis to Decide When to Collect?”. Besides that, though, the math described in your question doesn't sound accurate. In order for you to be due a total of $9172 in 4 months, your reduced monthly rate would need to be $2293. And since the percentage reduction for starting benefits 4 months prior to full retirement age (FRA) is approximately 2.22%, that would mean that your FRA rate would have to be $2346 in order to produce the reduced rate of $2293. That means the reduction in your monthly benefit rate would be $53, not $39.

It could be that the SSA representative was referring to starting your benefits effective with June, which would mean that you'd be paid your first check in July. That might account for the reduction only amounting to $39, but you would then only be receiving 3 months of early benefits instead of 4, which would likely amount to something more like $6879 as opposed to $9172. Either way, the upfront money you'd get would only put you ahead of the game for 12 to 15 years (not 19+ years), and after that, you'd be losing money every month for as long as you live.

That said, when you choose to start drawing your benefits is entirely up to you. However, I use maximization software so that you'll know the true long-term effects of your decision. Furthermore, if you were married to your ex-spouse for at least 10 years you may have even better options available to you.

Q: My wife and I turn 66 in October, 2016. My wife is not eligible, on her own, for Social Security benefits. According to the SSA website I would receive $2,617/month at age 66 if I filed for benefits. Based on my understanding of Spousal benefits my wife would receive $1,308/month. Together this would equal $47,100 annually or a total of $188,400 by the time we reach age 70. If we were to defer receiving benefits until we reach age 70 our annual amount would total $57,912 (my $3,518/month and my wife's $1,308/month) resulting in a $10,812 annual increase. By my calculation, our 'break even' point would be over 17 years at which time I would be 87. My current life expectancy is 84.4 years according to the SSA Life Expectancy calculator. Were I to die at 84 my surviving wife's total benefit would be my $3,518/month age 70 benefit amount. Can you explain why I wouldn't want to capture the $188,400 we would receive prior to age 70 and accept the reduced post age 70 benefit?

A: First off, there appears to be an error in your analysis. If you start drawing your benefits at age 66, your wife would only receive your age 66 benefit as a widow, regardless of how old you are at the time of your death. On the other hand, if you wait until age 70 to start drawing, your wife would receive your full rate including delayed retirement credits, or $3518 based on your figures.

In other words, your decision on when to file would have a direct impact on how much your wife would potentially receive as a widow. If you start drawing at age 66 instead of age 70, the lower rate would continue for as long as either of you live. Remember that if the average life expectancy is age 84, which is actually closer to age 87 for females who are currently age 66, it means that roughly half of those people will live longer than that. And, many of them will live significantly longer.

Q: Just about every financial advisor I see quoted suggest people wait till at least age 66 (if not 70) to collect SS Benefits. Very few times do I see something as to 'well it depends on how long you plan to live' etc. Reason I ask this is in my own case: I plan to retire at 64 but if I wait till age 66 to collect vs. starting at age 64, it will take me 12.6 years to break-even; therefore, a breakeven at age of 78.6. With a best guess life-expectancy of 84 why would somebody take the chance that they would live much longer than 84 OR that in order to fix SS from running out of funds the govt. doesn't start taxing a higher proportion of SS benefits (above the 85%) or even more likely -> means-testing. As you can guess from my question, I would be in the high-end, i.e. I should be receiving close to maximum (started paying into SS at age 15 and have been paying the max on SS taxes for around 20 years). I think that 6 years is too short a period of dying earlier (I know I could also live longer) or loosing benefits because the govt. takes them away. If I do not need the funds at 64 I figure I would save them/invest them.

My particulars to maximize: I was born on 11/1952 and wife on 12/1954. I plan to retire end of this year; and wife is retired but not collecting pension or SS benefits (I will be 64 and she 62 at the end of this year). I am a FERS (new govt. retirement plan) and my wife is CSRS-Offset (old govt. retirement system but that pays into SS and has paid into SS for around 15 years while in the govt. and about 5 years in the private sector – her pension will start end of 2016 as is mine when I retire). My SS at 64 would be $28K per year and at 66 would be around $32.4K per year. First, please let me know your thoughts re the first paragraph and second, should/could I file for half of her SS when she qualifies or what? (I don’t think Govt. Pension Offset affect us nor the Windfall Elimination Provision.)

A: To give you a quick answer, Social Security is providing longevity insurance. When we value insurance, we don't do so on a breakeven analysis. For example, we don't decide whether or not to buy homeowners insurance based on break-even. If we did, we'd never buy a homeowners policy -- the loads on insurance will always keep us, on average, from breaking even. The problem is we aren't insurance companies. We can't play the averages. Our house could burn down and saying that it wasn't expected, on average, to do so will be of no help in that circumstance. Just as with homeowners’ insurance, we need to consider the worst-case scenario when it comes to longevity risk. The worst-case scenario is dying at our maximum age of life, which could be 100 or even later. That's the worst-case because we'll have to keep paying for ourselves every year we continue to live. By exercising patience, you are getting a higher benefit, which will continue till you die and help you cover the financial worst-case catastrophe associated with living too long.