Most people don't know how long they will live. For the purposes of Social Security planning, that presents a challenge. While your monthly Social Security retirement benefit will increase with every year you wait to begin collecting between ages 62 and 70, pledging to wait until age 70 may turn out to be a poor strategy if you step in front of a bus at age 69. Conversely, you may regret beginning to collect at age 62 if you live to sample the cake at your 95th birthday party. But while it's rarely certain how long anyone will live, longevity should still be a primary concern when you decide when to begin collecting your Social Security benefits, says Theodore Sarenski, CEO and president of Blue Ocean Strategic Capital in Syracuse, New York. For example, he says that those who are in ill health or have a family history of shorter lifespans may wish to consider taking their benefits before their full retirement age. “If no one in your family has ever made it to 77, maybe you don't want to start (collecting benefits) at 66,” Sarenski says. But if your likely longevity is less clear than this example and you're undecided on when to begin collecting your benefits, how can you weigh the decision to collect now against the decision to wait? This is where the concept of a “breakeven age” comes into play.
What is a breakeven age?In Social Security terms, a breakeven age is the age you'll be when the cumulative payouts for two benefit start dates equal each other. If that sounds complicated, consider this example: John has decided to take his Social Security retirement benefits early at age 62. His monthly benefit is $1,500, or 75 percent of the $2,000 he would have gotten each month had he waited until his full retirement age of 66. So from the time he starts collecting until his full retirement age of 66, he'll collect $72,000 in benefits.
Now - had John waited until full retirement age to begin collecting and started collecting that $2,000 monthly benefit then, how long would it have taken before that extra $500 per month equaled the $72,000 he collected the first four years? The answer is 144 months - or 12 years.In other words, if John lives to exactly age 78, he'll have effectively “broken even” on his decision to collect Social Security at 62 versus waiting until his full retirement age of 66. If he lives past age 78, he would have gotten more from waiting until full retirement age. If he dies before age 78, his decision to collect Social Security at 62 will have netted him more than he would have gotten by waiting until his full retirement age.
Doing your own breakeven mathThe above example is simplified. The precise numbers on annual Social Security benefit increases vary according to when you were born and how long you wait to delay your benefits, and the impact of spouse's benefits and taxes can also impact your situation drastically. But performing a similar calculation with the exact numbers you get from Social Security - the official Social Security Administration website at SSA.gov offers some helpful tools here - may help if you feel conflicted about taking your benefits at a given age. Want to boost your retirement income outside of Social Security? Shop for a higher APY on MoneyRates.com's savings account page. While it may be a morbid task, considering the likely span of your life is an important part of this process. Mike Genovese, a certified financial planner and founding partner at Genovese, Burford & Brothers in Sacramento, California, says that an honest look at your health and family history is in order before you make the decision to begin collecting.
“If you've got longevity in your family and you think you can leg it out longer than the average bear, defer your benefits, especially if you are still working,” Genovese says. “You might as well let those 8 percent annual gains accrue. If you don't believe you're going to live that long, start taking it sooner rather than later.”Genovese adds that he sometimes runs calculations for clients to illustrate breakeven ages that they may wish to be aware of. “I've got a young guy who's developed a spreadsheet here, so we can run those numbers based on rate of return assumptions,” Genovese says. “We also factor in income taxation of the benefits. We can say '80 years old is the breakeven point,' and (our clients) can then make their decisions based on what their end game is.”