“When should I start my benefits to receive the largest total income?”

Breakeven analysis used to be the “the only game in town” for answering that question. New Social Security tools, with the ability to calculate hundreds, or thousands of different scenarios almost instantly, have made “breakeven analysis” almost obsolete. Monthly benefits vary by starting age, the older you are at start, the higher your monthly benefits; and, the younger you are at start, the smaller benefits.

Since benefits, regardless of when you start will last until your death, should you take less for longer or more for fewer years? Breakeven analysis compares two scenarios. If you took the larger income starting later, it determines the age you would have to live so that your total benefits are greater. That age is referred to as the “cross-over age” or “breakeven age.”

Breakeven Example

Consider a single client born in 1953 and fully-insured. His monthly benefit at full retirement age (age 66) is $2,400. If he takes a reduced early benefit at age 62 he will receive $1,800 monthly. A delayed benefit to age 70 would be $3,168 monthly. Let’s consider several breakeven analyses to answer this client’s question: “When should I start my benefits to receive the largest total income?”

Starting at age 66 instead of age 62 the breakeven age is 77
Starting at age 70 instead of age 62 the breakeven age is 80
Starting at age 70 instead of age 66 the breakeven age is 82

These numbers ignore cost of living adjustments. Would the results be different if cost of living adjustments averaged 2.5% over this period? Yes. The breakeven years would be a little sooner.

Starting at age 66 instead of age 62 the breakeven age is 75
Starting at age 66 instead of age 62 the breakeven age is 78
Starting at age 66 instead of age 62 the breakeven age is 80

But that ignores time value of money. Although the early benefits would be smaller, they can be spent now. If you consider the time value of money at 5% and the cost of living adjustments, the breakeven ages would be later.

Starting at age 66 instead of age 62 the breakeven age is 80
Starting at age 66 instead of age 62 the breakeven age is 83
Starting at age 66 instead of age 62 the breakeven age is 85

Your client agrees that he will probably live to at least age 85, that a reasonable cost of living adjustment should be assumed, and the time value of money should be included. So, how do you answer his question? You tell him to start at age 68!

How was that determined from these breakeven analyses? It can’t! Breakeven Analysis provides helpful information to the client, but it only provides tools to estimate the answer to the question: “When should I start my Social Security?”

Today’s tools, like Impact’s Social Security Explorer, makes answering the question easy. It calculates all the possibilities, using the conditions with which the client feels reasonable, determines the answer. The client wants a simple answer to his question—not various comparisons. Breakeven analysis is a good estimate, but not good enough with today’s technology.

For married couples the problem becomes even more complex. When one spouse dies, the survivor is eligible for an increased benefit—a survivor benefit. A typical breakeven analysis does not take these possible increases in benefits into account.

Instead of trying to figure out how to explain or make a breakeven analysis work, why not focus on the client’s original question: “When should I start my Social Security to get the largest total income?”

Using Social Security Explorer, the client decides what to assume, and then the software makes and compares the calculations. The client is shown almost instantly, the age combination that provides the greatest benefits and indicates it with a “star.” Breakeven analysis shows how long you must live for one scenario to be better than another. Social Security Explorer shows you best starting age considering the client’s other assumptions. Social Security Explorer provides answers to the real question.

J. Maxey Sanderson
President, Impact Technologies Group, Inc.

Posted May 20, 2014 filed under Articles.