Should I Use Break Even Analysis To Decide When To Collect?

Jul 4 2016 - 10:15am

Hi Larry,

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.)

Best, Carlos

Dear Carlos,

I recommend you read the discussion of Break Even Analysis in my new co-authored book, Get What's Yours -- The Revised Secrets to Maxing Out Your Social Security Benefits. But 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 (If that's what our software says is best to do since patience may not always be the best strategy.) 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.

best, Larry