Jonathan Peterson - Social Security For Dummies

But I also know that many people care — understandably! — how much Social Security they may get in a lifetime. In general, if you die before reaching the break-even age, and you started collecting benefits at the earlier date, you come out ahead. If you live beyond your break-even age but started benefits at the later date, you also come out ahead, because those bigger payments add up over time. Where you lose out is if you die before reaching the break-even age (and you started collecting larger benefits at the later date) or if you die after your break-even age (and you started smaller benefits at the earlier date).

The break-even approach is a common tool recommended by financial planners, and it can provide perspective. But it’s just one consideration. The more you care about how your benefits add up over a lifetime, the greater weight you may give a break-even calculation. The more you care about ending up with the biggest monthly benefit, the greater weight you may give to delaying your claim for Social Security.

Your break-even age will vary based on your earnings record and date of birth, but estimating it isn’t too difficult. Here’s how to compare how you’ll come out over your lifetime if you start benefits at age 62 versus your full retirement age:

1 Determine your full retirement age (refer to Table 3-1 ).For example, say your full retirement age is 66.

2 Determine your full retirement benefit at that retirement age by going to www.ssa.gov/estimator .For example, say your full retirement benefit at 66 is $1,500 per month. ( Note: The estimator assumes you keep working until age 66.)

3 Determine your benefit at 62 by going to www.ssa.gov/estimator .In this example, if you claim benefits at 62, your monthly payment is $1,125.

4 Figure out how much you would take home in the 48 months between age 62 and your full retirement age (66) if you start collecting at age 62.In this example, you’re taking home $1,125 per month, and you’re doing that for 48 months, so multiplying $1,125 by 48 months gives you $54,000.

5 Now figure out how many months you would have to survive beyond age 66 in order to break even.In this example, the difference in monthly payments taken at age 62 ($1,125 per month) and 66 ($1,500 per month) is $375. So, divide the amount from Step 4 ($54,000, in this example) by the difference in monthly payments ($375, in this example), and you get the number of months you’d have to survive beyond age 66 in order to break even (in this case, 144 months, or 12 years). So, in this example, if you live past age 78, you come out ahead by starting your benefits at the full retirement age of 66.

If doing all that math doesn’t appeal to you, and if you were born between 1943 and 1954, here are some general guidelines:

If you’re comparing retirement at 62 with full retirement at 66, your break-even age is typically around 77 or 78. In other words, if you die earlier, you could end up with more money by claiming early retirement benefits. If you live longer, you could be better off taking your benefits at 66.

If you’re comparing full retirement at 66 with delayed retirement at 70, your break-even age is typically several months after your 82nd birthday. In other words, if you die before 82 or so, you could end up with more money by beginning benefits at 66. If you live past 82, you could be better off delaying your retirement benefits until you turn 70.

Social Security provides a kind of insurance against running out of money for however long you live. The guarantee of inflation-protected income makes Social Security different from a typical investment. For many people, a range of considerations affect the timing of a claim. The break-even analysis is just one piece of information.

Half the people in any given age group will exceed their life expectancy, in some cases by a lot. Does longevity run in your family? For older couples in decent health, the odds that at least one spouse will survive to a ripe old age are very high. Life expectancy may be higher if you have a good education, if you make a nice living, if you’re closely connected to your friends and family, and if you’re careful about keeping in shape.

The possibility of living a very long life can be a big factor when you’re deciding when to start Social Security. You could live a lot longer than you expect. That means your price tag for retirement will keep going up, while financial resources may dwindle. How much will the cost of living be 20 or more years down the road? What about doctors’ bills or long-term care needs? How long can you realistically expect your savings to last? The bigger Social Security payment you get by delaying benefits until you’re 70 could come in very handy in those later years.

Here’s some food for thought: A man who turned 65 in 2015 can expect to live about another 17.9 years. A woman who turned 65 in 2015 can anticipate another 20.5 years. At age 75, he can expect another 11.2 years, and she can expect another 13. If that man and woman make it to 85, each is projected to live past their 90th birthday. Among today’s 65-year-olds, one in three will make it past 90. Almost one in ten will reach 95.

Knowing your life expectancy isn’t enough. You also need to know what gives you peace of mind when it comes to money. What do you think is worse: living longer than you expected and running short of money, or living shorter than you expected and feeling secure until the end (even if you didn’t max out your lifetime Social Security benefits)?

To illustrate, I present Eager Edgar and Steady Betty, two pre-retirees who are thinking about the next phase of their lives in very different ways. Both are 61 and have had virtually identical earnings in their careers.

Eager Edgar dreams of retiring from his job as a warehouse manager and trekking through the wilderness while he still has the energy. His parents died young, and he views early retirement as his last sure chance to really live. He has a couple hundred thousand dollars in an individual retirement account (IRA), and his rent is modest. The month after he turns 62, Edgar collects his first Social Security payment of $1,600.

Steady Betty sees the world differently. She likes her accounting job, even though the commute is increasingly stressful. But Betty doesn’t want to worry about money when she’s older, and she knows her mother lived until 90. Betty decides to wait until she reaches 66 (her full retirement age) before claiming Social Security. The prospect of getting a bigger monthly payment and building her nest egg further gives Betty peace of mind.

Fast-forward a few years. Eager Edgar’s arthritis is getting worse, and his medications are costing more and more. After a couple of adventures in the Rocky Mountains, his hiking equipment begins to gather dust. Unplanned costs for healthcare, a loan to his unemployed son, and the rising cost of living reduce Edgar’s savings. A long stint in a nursing home costs him $30,000. For the last three years of his life, Edgar is obsessed with the fear that his savings will run out and he’ll lose his independence, all because he has to survive on the reduced Social Security benefits he chose. He takes to splitting pills in half, which increases his pain. He dies at 84, a lot later than he expected.