The Problem with the Break-Even Analysis

Should you start taking Social Security at 62, 70, or somewhere in between?

If you didn’t already know, the longer you wait to withdraw SS (up to 70), the more money you receive.

So naturally, people begin to ask themselves, when should I begin to withdraw?

A common take on this question is to use something called a break-even analysis. Let’s look at a quick example of what this means.

Someone who is 40, earning a salary of $60,000, might expect to one day see SS benefits looking like this.

  • At Age 62: $1,500/mo
  • At Age 67: $2,350/mo
  • At Age 70: $2,700/mo

Again, we see that the longer you wait, the more money you receive. So if you waited until 70, how long would you have to live to catch up with the amount you would’ve had if you started withdrawing at 62?

In this case, 80 years old.

  • At Age 62: 18 years * 12 months * $1,500 = $324,000
  • At Age 70: 10 years * 12 months * $2,700 = $324,000

NOTE: A typical break-even point is usually between 78 and 82 – closer to 78 if you’re older and closer to 82 if you’re younger.

What can you learn from such a calculation?

  1. If you live past 80, you will have earned more by taking SS later, at 70.
  2. And if you didn’t make it to 80, you will have earned more money by taking SS sooner, at 62.

So that’s it! If you know you’re going to die at 75, you would want to take your SS sooner. But if your death-day is 85, you’ll be better off taking it later!

Right? . . .

This is the problem with the break-even analysis. It takes, “when should I begin to withdraw SS?”, and it reframes it as, “how long do I need to live to make waiting worth the money?”

There’s just one problem… We don’t know when we’re going to die!

You could die tomorrow! You might live well into your 90’s. So how can you plan to get your money’s worth? You can’t. So what should you do?

Plan for longevity.

Rather than worrying about getting your money’s worth out of SS, think to yourself, “What if I live a long time? What if my spouse lives a long time? What if he/she outlives our money? What could I do to prepare for that?”

Now, I am NOT saying that everybody should wait until 70 to start taking SS. There are still factors at play, such as savings, life-stages, and health. When you’re 85, you very well may not care that your SS dollars are fewer than they could have been. But what I am saying is, don’t let worrying about getting cheated out of SS be the reason you withdraw earlier than you need to. I want to encourage you to err on the side of longevity, for yourself and especially for your spouse.

And if God calls you home before your break-even age, I doubt you’ll be complaining.

2 responses to “The Problem with the Break-Even Analysis”

  1. I used to think that I would claim early and invest the money and come out ahead. But now I’m learning that equivalent earnings rates would be difficult to achieve with safe investments. Plus the fact that the SS payments keep coming until you die…

    I like the part about planning to live long.

    Liked by 2 people

    • That’s a good point. You may have seen Wade Pfau call this the best annuity money can buy. Meaning, if you look at the money you forgo starting at age 62, as the cost of buying an annuity, then there’s essentially no other annuity out there that brings this level of payments.

      Liked by 2 people

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