The Social Security 'Breakeven' Age No One Tells You About - And Why It Changes Everything

Decisions about Social Security can affect whether you're on track for retirement or not. If you claim Social Security at the optimal time, you may increase your lifetime income. Unfortunately, it's hard to figure out the best age, especially given that many people don't know how to calculate their breakeven age.

The Social Security Administration used to provide information on your breakeven age, but stopped in 2008 out of concern that the calculation was causing people to claim too early. An old report from the RAND Corporation also found that a breakeven analysis could cause people to start benefits at a younger age than they should.

In reality, though, a break-even analysis helps you make a better choice if you just look at it the right way. Here's why.

What is a breakeven age?

If you delay your Social Security claim, you give up years of benefits that you could have had in exchange for a higher future benefit.

Eventually, the goal is to break even for the benefits you miss by collecting enough of the higher benefits in the future. Once you break even, if you live longer and keep collecting benefits, a later claim provides more lifetime income.

How do you calculate your breakeven age?

Calculating your breakeven age is easy. You just need to find out what your benefits would be at two different ages at which you could claim benefits. Your mySocialSecurity account provides this information. Once you know your benefits at different ages, you just have to do some simple math:

• Calculate the income you'll miss. If you're deciding whether to claim at 62 and 70, you'd miss eight years of monthly income by waiting. Multiply the benefit you'd collect at 62 by eight years. If you'd collect $1,400 per month, that's $16,800 in missed annual income for eight years or $134,400.
• Calculate how much higher your benefit is by waiting. At 70, your benefit would be worth $2,480 compared to $1,400 at 62. You'd collect an extra $1,080 per month.
• Determine your breakeven point. That's the point when you've collected $1,080 per month long enough to make up for passing up $134,400 in income over eight years. Divide $134,400 by $1,080 to see that you need 124.4 monthly payments to break even.

Why was a breakeven age throwing people off?

The Social Security Administration decided to stop providing a break-even date for retirees because it was causing many people to claim early and lock in lower lifetime payments.

RAND Research actually found that using a breakeven analysis resulted in "substantially earlier" expected claiming dates. That's because when the benchmark was set at a younger age, the focus was on making up for the "lost" income or the forgone benefits. People didn't want to risk losing the money with a later claim.

If the focus is instead on the gains from the later claim, people are more likely to wait.

How to make an accurate decision based on a breakeven analysis

While it's understandable to be risk-averse, the reality is that the breakeven analysis shouldn't focus on gains or losses.

You should use it solely to determine how long you must live to make up for benefits you delay receiving. Then, consider longevity data, life expectancy, and your health status to decide when to claim Social Security.

If you claim Social Security at 70 instead of 62, for example, you typically must wait around 10.4 years to break even or until just over 80 years old. Since TIAA reports that there's about a 66% chance of a 67-year-old man living until 80 and a 75% chance of a 67-year-old female living that long, waiting often makes a lot of sense. For a 65-year-old couple, the odds are about 50-50 that at least one spouse lives to 90.

You have to look at not just overall life expectancy, but at life expectancy for older people to see the likelihood you'll live long enough to break even.

Other advantages of a later claim

It's also worth taking into account other advantages of a delayed claim as well when you're doing your breakeven analysis.

Specifically, survivor benefits are higher if the higher earner waits to claim them, which helps out the last surviving spouse. Plus, Social Security Cost of Living Adjustments (COLAs) are based on a percentage of your benefit, so a higher benefit from delaying means larger future COLAs.

You'll want to go beyond your breakeven age to consider these factors, too, as you decide on a claiming age.

Bottom line

Your Social Security claiming choice needs to be based on many factors, including your other assets, health, marital status, ability to retire without Social Security, desire to retire, and other personal details.

The key is to make your breakeven analysis part of the big picture as you formulate your retirement plan, and to use the information from it wisely, given the truth about how long you're likely to live.